Cisco's Rich Uncle
Analysts say one reason for this is that, despite its aggressive marketing, no more than 20 percent of Cisco's business comes from telecom service providers, the group of companies hardest hit by the downturn. But Cisco also gets plenty of help from Uncle Sam, they say.
Cisco CEO John Chambers acknowledged during the company's second-quarter conference call that, depending on the quarter, between 10 and 15 percent of Cisco's U.S. enterprise business comes from federal government contracts. Although exact numbers aren't available, the available information suggests that the government spends hundreds of millions of dollars a year on Cisco gear.
Contrast that with competitors such as Juniper Networks Inc. (Nasdaq: JNPR), who doesn't report the government as one of its "10 percent" customers. Foundry Networks Inc. (Nasdaq: FDRY), however, says the government makes up between 8 and 12 percent of its business, depending on the quarter.
Even if Cisco gets the same proportion of government business as do its competitors, the numbers still stack in Cisco's favor. Foundry's second quarter pro forma revenues were $75 million for the three-month period ending June 30. Cisco's net sales for its most recent quarter, which ended July 27, were $4.8 billion.
As it turns out, Cisco's steady (and growing) government business could not have come at a better time. Had the U.S. government slowed spending as much as Cisco's other enterprise customers did, the current chapter in Cisco's history might be a much darker read.
Cisco won't confirm specifically how much of its sales come from the government, but it does acknowledge the importance of the government channel. "The federal government segment is an important part of Cisco's business, and we believe it will continue to be a strong vertical market," says Abby Smith, a Cisco spokesperson.
Though government spending is a bit lumpy throughout the year, analysts see the government being another big Cisco stabilizer during the company's current quarter, which ends in October. "We expect…enterprise booking [to be] flattish after a strong fiscal 4Q02 and federal spending pushing its contribution to total sales back over 10 percent in fiscal 1Q03," writes Gabriel Lowy, an analyst at Crédit Lyonnais Securities Inc..
With homeland security and updated databases a priority, government spending on technology doesn't look to be slacking. INPUT, a market research firm, predicts that government spending on information systems and services will grow from $37.1 billion in fiscal year 2002 to $63.3 billion in fiscal year 2007. The same firm says government spending on telecommunications products and services will grow about 8 percent a year, from $10.8 billion in fiscal year 2002 to $16.1 billion in fiscal year 2007.
Finally, it's no coincidence that Cisco CEO John Chambers has always made sure that he and his company are active in Washington, even when it was voguish for tech companies to ignore the political establishment.
As with any other large Cisco customer, Chambers stays personally involved in the relationship. Prior to President Bush's election, Chambers gave $1,000 to Bush's campaign (the maximum contribution allowed from an individual), and another $280,000 to the Republican Party, according to the Center for Responsive Politics.
— Phil Harvey, Senior Editor, Light Reading