2009 Zacks Investment Research, All Rights reserved. www.zacks.

com

Cisco Systems, Inc.
(CSCO-NASDAQ)
SUMMARY
SUMMARY DATA
Risk Level * Low,

Type of Stock Large-Blend

Industry Comp-Networks

Zacks Industry Rank * 105 out of 217

Current Recommendation
NEUTRAL
Prior Recommendation OUTPERFORM
Date of Last Change 12/07/2009

Current Price (12/04/09) $24.16
Target Price $26.00
Cisco Systems is a leading provider of IP-based
networking and other products. The company s first-
quarter results were a significant improvement over
prior quarters, with both revenue and earnings
exceeding our expectations. Of particular note is the
growth in orders, which indicates continued business
momentum. Improving operating performance, solid
financials, a sound restructuring policy and new
growth initiatives are positives. However, the
increasing competition is leading to market share
losses and the complicated decision-making process
and integration risks are making matters worse.
Consequently, we are downgrading CSCO shares to
Neutral.
52-Week High $24.38

52-Week Low $13.62

One-Year Return (%) 51.57

Beta 1.21

Average Daily Volume (sh) 35,687,472

Shares Outstanding (mil) 5,752

Market Capitalization ($mil) $138,968

Short Interest Ratio (days) 0.88

Institutional Ownership (%) 71

Insider Ownership (%) 1

Annual Cash Dividend $0.00

Dividend Yield (%) 0.0

5-Yr. Historical Growth Rates

Sales (%) 12.2

Earnings Per Share (%) 9.5

Dividend (%) N/A

P/E using TTM EPS 18.2

P/E using 2010 Estimate 16.9

P/E using 2011 Estimate 15.0

Zacks Rank *: Short Term
1

3 months outlook 3

* Definition / Disclosure on last page

ZACKS ESTIMATES
Revenue
(In millions of $)
Q1 Q2 Q3 Q4 Year
(Oct) (Jan) (Apr) (Jul) (Jul)
2008
9,554 A 9,831 A 9,791 A 10,364 A 39,450 A
2009
10,331 A 9,089 A 8,162 A 8,535 A 36,117 A
2010
9,021 A 9,374 E 9,438 E 9,825 E 37,658 E
2011
41,580 E
Earnings Per Share
(EPS is operating earnings before non-recurring items)
Q1 Q2 Q3 Q4 Year
(Oct) (Jan) (Apr) (Jul) (Jul)
2008

$0.40 A $0.38 A $0.38 A $0.40 A $1.56 A
2009

$0.42 A $0.32 A $0.30 A $0.32 A $1.36 A
2010

$0.39 A

$0.35 E

$0.35 E

$0.34 E

$1.43 E

2011

$1.61 E

Zacks Projected EPS Growth Rate - Next 5 Years % 11

Consensus Projected EPS Growth - Next 5 Years % 10

December 07, 2009
Equity Research Page 2

OVERVIEW
Cisco Systems Inc. is an Internet protocol (IP)-based networking company, which also offers other
products, technologies and related services to communications and information technology service
providers, companies, commercial users and individuals.
The company reports revenue according to five geographic segments. The U.S. and Canada was the
largest segment in 2008, generating 54% of revenue (up 10.0% from 2007), Europe 21% (up 9.9%),
Emerging markets including Eastern Europe, Latin America, the Middle East, Africa, Russia and the
Commonwealth of Independent States 11% (up 40.0%), Asia Pacific 11% (up 17.1%) and Japan 3%
(up 3.1%).
Cisco is one of the largest providers of routers and switches. Routers are responsible for transporting
information in the form of data, voice and video from one IP network to another. The nature of the router
determines the security, reliability, scalability and efficiency of the transmission process.
Switches play an important part in the aggregation and distribution of information. They collect
information in local area networks (LANs), metropolitan area networks (MANs) and wide area networks
(WANs), filtering, processing and distributing it in the required volume and to the designated locations.
They typically provide connectivity to end users, workstations, IP phones, access points and servers.
The Advanced Technologies product line includes seven product categories. Application networking
services are special products designed for secure transfer of applications within a local or wider area, at
the same time ensuring the security of computing resources. The home networking line provides
connectivity to the Internet, printers, music, movies and games through voice and data modems, routers,
network cards, media adapters, Internet video cameras, network storage and universal serial bus (USB)
adapters.
Security includes both products and services designed to prevent unauthorized access to system
resources and offering a certain level of protection from worms, spam, viruses and other malware. The
Revenue by Geography in 2008
Europe, 20%
Emerging
Markets, 11%
Asia Pacific, 11%
Japan, 3%
U.S. and Canada,
54%
Equity Research Page 3

storage area networking (SAN) category provides multilayer, secure, scalable connectivity between
servers and storage systems. Unified Communications are available as software, standalone devices and
integrated components in routers and switches. They enable the distribution of voice, video, data and
mobile applications on fixed and mobile networks, enriching user experience.
Video systems include digital set-top boxes and media technology products, which enable reception,
encoding, transcoding, transrating, multiplexing, switching and modulation. Wireless technology includes
networking products, such as access points, wireless LAN controllers, wireless integrated switches and
routers, wireless management software, wireless LAN clients and client software, bridges, antennas and
accessories.
The Other products segment includes analog and digital optoelectronics products, as well as cable
access and voice over IP (VoIP) services. New emerging technologies are being added to this segment.
The company also offers related Services. Other than technical support, Cisco also offers
comprehensive specialized services under dedicated programs that support its technologies, depending
on specific networking requirements.
Products are sold through a direct sales force, as well as systems integrators, service providers,
resellers, distributors and retail partners. Some of the more significant competitors include Alcatel-Lucent,
ARRIS Group, Aruba, Avaya, Brocade, Check Point, D-Link, LM Ericsson, Extreme, F5, Force10,
Fortinet, HP, Huawei, IBM, Juniper, Meru, Microsoft, Motorola, NETGEAR, Nortel, Riverbed and
Symantec.
Product Lines in 2008
Routers, 20%
Switches, 34%
Advanced
Technologies,
25%
Other, 5%
Service, 16%
Equity Research Page 4

REASONS TO BUY

We are particularly encouraged by the pattern of order growth, which seems to indicate that the
company is past the bottom. Orders started growing sequentially in the fourth quarter of fiscal 2009.
However, what is more significant is the substantial improvement in year-over-year comparisons. In
the last quarter, worldwide order rates were down in the high single-digits, compared to a decline of
around 20% in the immediately preceding quarter. Order rates in the U.S. were even better, with the
year-over-year comparison roughly flat, compared to an average 30% decline in the three preceding
quarters. Management stated that enterprise orders in the U.S. grew 10% and public sector orders
grew high single digits. This was offset by commercial orders, which were down mid-single digits,
and service provider orders, which were down high single-digits. Japan, China, India and the
Asia/Pacific saw strength, Europe saw partial recovery, while other emerging markets remained
challenging. We consider the improvement in orders a big positive, because it seems to indicate that
the company is on the road to recovery. It also gives us confidence that there will be regular
seasonal growth in ensuing quarters.

Fiscal 2009 (ended Jul 2009) has been very difficult for Cisco, but management has kept a tight rein
on expenses. Although revenue declined 8.7% for the year, operating profit dollars declined just
3.6%. This is particularly commendable when you consider the relatively rigid cost of sales and the
discounts offered across several geographies in order to boost revenue. The company also
generated $2-3 billion in operating cash flow over the last four quarters.

Cisco management has an ongoing restructuring policy, which management refers to as limited
restructuring. The idea behind this sort of restructuring is that management is exonerated from
making public announcements and complying with severance laws. For the most part, employees do
not get a bad deal, so the entire process is both quiet and smooth. Simultaneously, the workforce at
lower-cost locations, especially in India has continued to increase. In the third quarter, management
announced a restructuring program that would reduce the headcount by 1500 to 2000 by the end of
the year. We expect this to further lower the expense base, thus improving profitability.

Cisco has been expanding into what management calls market adjacencies. This is basically an
initiative to use core competencies to exploit opportunities in adjacent markets. The company has
made some headway in three areas smart connected communities, small business and smart
grids. As part of the smart connected communities initiative, it has partnered with Gale International
to enter into an agreement with the Mayor of Incheon, Korea. The partnership will build technology
infrastructure at Songdo City in Incheon. Management expects the partnership to open the door to
other similar opportunities, especially in China. The small business initiative was designed after
consideration of all functions that a small business would require. Since this segment is usually the
first to recover as recessionary pressures ease off, management has devoted some R&D dollars to
develop products targeting it. For example, the recently introduced ESW 500 switches are
reasonably priced and come with necessary features and support. Management has discussed the
possibility of combining the small business offerings with cloud computing to enable the company s
partners to offer these customers future Cisco products on an as-a-service basis. The smart grid
program is intended to enable secure energy management on electrical grids from the transmission
to the consumption stages. To this end, Cisco has formed agreements with a large number of
companies, including IBM and GE, utilities such as Florida Power & Light and Duke Energy as well
as standards authorities such as Institute of Standards and Technology, Federal Regulation and
Oversight of Energy, and North American Electric Reliability Corporation.

The company continues to boast a very strong balance sheet, with around $31 billion in highly
liquid short term investments and another $5 billion in cash. Total debt is negligible and the debt-to-
total capital ratio is 28%. Management returns value to customers through regular share
repurchases and we expect this activity to continue in the foreseeable future.
Equity Research Page 5

REASONS TO SELL

Cisco continues to acquire a large number of companies. While this improves revenue opportunities,
it increases integration risks. The company operates in both developed and emerging economies;
therefore there are many cultures and practices that have to be incorporated within it. When
acquisitions are added to this, mot only products and platforms, but also corporate cultures have to
be integrated. This takes up management time and effort, which could have been put to other use.

Management has established a very elaborate decision-making process. Although it continues to
promote this process, there is increasing dissatisfaction from shareholders. Cisco s size itself slows
down the system and rather than simplifying processes, management has added several layers.
Management believes this helps to avoid mistakes, but in fact the number of councils, boards and
committees delays important decisions, which in turn, increases reaction time to competitors
actions.

The company is steadily losing market share to HP, Juniper, Fortinet and Palo Alto Networks.
Certain channel conflicts in the server market are also contributing to share losses. Cisco offers
price discounts to outdo the competition, but the typically slow decision-making process results in
dubious gains. On the other hand, lower prices have the inevitable negative impact on margins.

The company s pricing policy is inflexible relative to other competitors and competition is ugly in
some cases. For example, HP Pro-Curve is snatching customers on a deal-by-deal basis, by
offering significant discounts for exchanging Cisco products. Chinese giant Huawei is making life
difficult in China. Recently, HP announced its decision to acquire 3Com. This combination could be a
real threat to Cisco because 3Com has a strong position and important relationships in China
(including with Huawei). The combination would mean further competition in China, as HP would
gain position in the region. 3Com also has operations in China, which would reduce operating costs
for the combination.
RECENT NEWS
Cisco Systems (CSCO) first quarter 2010 earnings beat the Zacks consensus by 13 cents. Revenue
beat by 3.1%. Both revenue and EPS were significantly better than the guided range.
Revenue
Revenue of $9.02 billion was up 5.7% sequentially and down 12.7% year over year. Revenue was at the
high-end of management s guidance range of a year-over-year decline of 15-17%.
Products generated 80% of revenue, increasing 7.0% sequentially and declining 16.6% year over year.
Order rates also strengthened, particularly in the U.S., indicating continued revenue growth in the next
quarter. Management stated that the company saw bottom in the fiscal fourth quarter, with improvement
in the first. Results are likely to trend upward going forward.
Around 55% of total revenue was generated in the U.S. & Canada (up 5.1% sequentially), 20% came
from Europe (up 9.3%), Emerging markets 9% (up 7.4%), Asia Pacific 11% (down 0.4%) and Japan 4%
(up 12.4%). All geographies declined on a year-over-year basis, with the exception of Japan, which
increased 2%. This was mainly due to recession-related weakness, as a result of which growth came off
a smaller base.
Equity Research Page 6

Revenue by Product Line
Routers were 17% of total revenue, representing a sequential increase of 5.2% and a year-over-year
decline of 17.0%. All categories of routers, including low-, mid- and high-range, declined double-digits
from the year-ago period.
Switches were 32% of revenue, flat sequentially and down 20.6% year over year, with modular and fixed
switches contributing almost equally to the year-over-year decline.
Advanced Technologies generated 26% of revenue, up 13.6% sequentially and down 15.1% year over
year. There was particular weakness in video systems, although unified communications and
securitywere also significantly weaker than the year-ago quarter.
The Other segment brought in 5% of revenue, increasing 24.3% sequentially and 8.8% year over year,
mainly due to the impact of the Pure Digital acquisition and strength in tele-presence.
Services generated 20% of total revenue, growing 0.8% sequentially and 7.4% year over year.
Gross Margin
The company generated a gross margin of 66.3% in the last quarter, a sequential increase of 94 bps and
a year-over-year increase of 66 bps.
The product gross margin was 65.5%, up 167 bps sequentially and down 1bp year over year. The
sequential increase was driven by lower discounts, increased cost savings and higher volumes shipped.
The services gross margin declined 20 bps sequentially and increased 392 bps year over year. The
sequential decline was on account of investment in certain projects, partially offset by volume. The year-
over-year increase was driven by improved margins in both technical support and advanced services, as
well as higher volumes.
Operating Performance
The operating expenses of $3.38 billion were higher than the previous quarter s $3.35 billion. The
operating margin was 28.8%, up 272 bps sequentially and down 98 bps year over year. The operating
Revenue by Product Line
$0
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
$7,000
$8,000
$9,000
$10,000
1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10
Quarter Ending Date
U
S
$

(
M
i
l
l
i
o
n
s
)
Routers Switches Advanced Technologies Other Total Product Service
Equity Research Page 7

margin improvement was largely on account of cost controls, especially G&A (as a percentage of sales).
G&A expenses were down 475 bps sequentially, although COGS, R&D and S&M also declined (as a
percentage of sales).
On a pro forma basis, CSCO generated a net income of $2.26 billion, or a 25.1% net income margin
compared to a $1.84 billion, or 21.5% in the previous quarter and $2.50 billion or 24.2% net income
margin in the same quarter last year.
The fully diluted pro forma earnings per share (EPS) was $0.39, compared to $0.32 in the Jun quarter
and $0.42 in the prior-year quarter. Our pro forma estimate excludes acquisition-related costs, deferred
stock compensation and amortization of intangibles in the last quarter. Our pro forma calculations may
differ from management s presentation due to the inclusion/exclusion of some items that were not
considered by management.
On a fully diluted GAAP basis, the company recorded a net income of $1.79 billion ($0.30 per share)
compared to $1.08 billion ($0.19 per share) in the previous quarter and $2.20 billion ($0.37 per share) in
the prior-year quarter.
Balance Sheet
Inventories increased 1.4% to $1.09 billion, yielding inventory turns of 11.2x. Days sales outstanding
(DSOs) were around 32 days. The company ended with a cash and investments balance of $35.37
billion, an increase of $364 million from the end of the previous quarter. In the first quarter, the company
generated $1.49 billion cash from operations and spent $1.87 billion on share repurchases. Cisco had
$10.27 billion in long term debt, amounting to a net cash balance of $25.09 billion. Including long term
liabilities, the debt-cap ratio was a mere 27.9%.
Guidance
In the second quarter, management expects revenue growth of 2-5% on a sequential basis and 1-4% on
a year-over-year basis. The gross margin is expected to be 64-65%, operating expenses 37.5-38.5% of
revenue, interest and other income of approximately $25 million, tax rate 22% and a decline in the
weighted average share count of approximately 50 million. The company expects one-time charges, such
Revenue and Margins
$0
$2,000
$4,000
$6,000
$8,000
$10,000
$12,000
$14,000
1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10
Quarter Ending Date
U
S
$

(
M
i
l
l
i
o
n
s
)
0%
10%
20%
30%
40%
50%
60%
70%
Revenue Gross Profit Operating profit EBITDA
Gross Margin Operating Margin Cash Margin
Equity Research Page 8

as stock based compensation and acquisition-related expenses of around $0.06 to $0.08 per share.
Management expects the company to generate operating cash flow of $1.8-2.1 billion.
VALUATION
Year to date, Cisco shares are up 42.5%, significantly better than the S&P 500. The company s current
trailing 12-month earnings multiple is 18.2X, compared to the 126.7X average for the peer group and
27.6X for the S&P 500. Over the last five years, Cisco s shares have traded in a range of 10.7X to 26.5X
trailing 12-month earnings. Therefore, it is currently trading in the middle of the range. The stock is also
trading at a significant discount to the peer group, based on forward earnings estimates. The current 50%
discount to the peer group for 2010 is toward the low end of the historical range. Our Neutral
recommendation on the stock indicates that we expect it to trade at the current level over the next three
to six months. Our $26 target price, 18.2X 2010 EPS, reflects this view.
Key Indicators

P/E

F1

P/E

F2

Est. 5-Yr

EPS Gr%

P/CF

(TTM)

P/E

(TTM)

P/E
5-Yr
High

(TTM)
P/E
5-Yr
Low
(TTM)
Cisco Systems, Inc. (CSCO) 16.9

15.0

9.9

16.0

18.2

26.5

10.7

Industry Average 34.0

32.6

15.2

21.1

126.7

252.6

20.9

S&P 500 19.1

15.0

10.7

27.6

27.5

13.8

Wyndstorm Corp. (WYND)

MPC Corp. (MPCCQ)

Brocade Communications Sys. (BRCD) 16.7

14.0

13.3

17.8

20.3

40.2

4.6

McAfee Inc. (MFE) 20.5

18.1

14.5

15.2

23.2

49.0

17.7

TTM is trailing 12 months; F1 is 2010 and F2 is 2011, CF is operating cash flow

P/B
Last
Qtr.
P/B
5-Yr High
P/B
5-Yr Low
ROE
(TTM)
D/E
Last Qtr.
Div Yield
Last Qtr.
EV/EBITDA
(TTM)
Cisco Systems,
Inc. (CSCO) 3.4 6.5 2.3 16.8 0.3 0.0 11.9

Industry Average
3.1 3.1 3.1 -45.1 0.2 0.0 10.2
S&P 500
3.5 10.0 2.9 22.4

2.1

Equity Research Page 9

Earnings Surprise and Estimate Revision History

Equity Research Page 10

If you do not agree with our NEUTRAL recommendation for CSCO
Read why professional investors may have a different recommendation on the stock
Go to: http://www.stockresearchwiki.com/tiki-index.php?page=CSCO/Ticker

DISCLOSURES & DEFINITIONS
The analysts contributing to this report do not hold any shares of CSCO. Zacks EPS and revenue forecasts are not consensus
forecasts. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal
views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly,
related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this
report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to
accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet
the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an
offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a
position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the
securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to
twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve
months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The
current distribution of Zacks Ratings is as follows on the 863 companies covered: Outperform- 17.6%, Neutral- 76.1%, Underperform

6.0%.
Data is as of midnight on the business day immediately prior to this publication.
Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in
earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model
assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks
Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a
company s industry group. We have 217 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 217. In terms of
investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In
determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each
stock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5
th
group has the highest
values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the
second, third, and fourth groups of stocks, respectively.