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Cisco Posts Gains, Will Enter New Markets

While reporting gains in sales and net income, CEO John Chambers reveals plans to enter several new markets in the next 12 to 18 months.

Cisco Systems, enjoying success in the new markets it has entered in the past couple of years, plans to attack five or six new "advanced technology" markets in the next year or two, CEO John Chambers told analysts Tuesday. But he wouldn't say which markets.

Chambers disclosed those plans during a conference call in which the company reported gains in revenue and profits for its fourth quarter and for its fiscal 2005. Revenue for the quarter was $6.6 billion, up 11.1% from the same quarter a year earlier; net income was $1.5 billion, up from $1.4 billion a year earlier.

For the full fiscal year ending July 30, revenue was $24.8 billion, a 12.5% increase from the previous year, while profits were $5.7 billion, up from $4.4 billion in fiscal year 2004. The gains were solid across every product segment, customer category, and geographical region.

"It was a very solid quarter for us," Chambers said. "I am very pleased with our results."

Large businesses, which make up around 45% of Cisco's revenue, still are showing caution when it comes to capital spending, with growth only in the high single digits. Small and midsize businesses were Cisco's fastest-growing customer segment, showing year-over-year growth of more than 20%.

Cisco's services unit posted revenue of $1.1 billion, the first quarter that business posted more than $1 billion in revenue. Chief development officer Charles Giancarlo was quick to point out in an interview that Cisco doesn't intend to become a services company. "For the most part, we rely on our systems-integration partners to provide services to our customers," he said.

Chambers predicted that Cisco's orders and revenue will grow in the 10% to 15% range annually for the next several years, assuming the company executes well and the overall global economy stays on track.

Chambers noted that several years ago, when Cisco was suffering along with most other tech companies after the Internet boom went bust, the company decided to invest in several areas it calls "advanced technologies." That investment has paid off, he said, with strong products, sales, and growth in several of those markets, which include enterprise IP communications, security, wireless LANs, home networking, storage, and optical communications.

Enterprise IP communications and security have become billion-dollar businesses for Cisco, while home networking and wireless LANs are getting close to that level, Giancarlo said. And they're still showing strong growth. Enterprise IP, for example, posted gains in the fourth quarter of 50% compared with a year earlier. Storage orders grew better than 40%, while orders for home networking, security, and wireless LANs grew from 25% to around 35%.

"We intend to introduce a second wave of advanced technologies," Chamber told analysts. "We intend to introduce a new one every three or four months in the next fiscal year." He wouldn't provide specifics.

Cisco usually does development work for a couple of years before it enters a new market, and that it's targeting markets that have the potential to become billion-dollar businesses, Giancarlo said. "I don't think anybody will be surprised at the markets we enter," he said.

Chambers dismissed rumors that Cisco might buy cell-phone equipment maker Nokia. "It is extremely unlikely that we will do a large acquisitions. They almost all fail," Chambers said. "I was very surprised at the credibility the market gave to recent rumors."

He went on to describe Cisco's "ideal" acquisition target as a private company with around 100 employees that's just starting to generate revenue. In the most recent quarter, Cisco completed the acquisitions of Fine Ground Networks, M.I. Secure, NetSift, Sipura Technology, TopSpin Communications, and Vihana.

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