Global Growth a Boost for Cisco
Cisco's quarter, all panic selling aside, was far more in the sublime category than the "subprime".
Global service provider growth was over 20% on a $6 bln run rate base - very strong growth from an area many thought would never exhibit this kind of growth again in our lifetimes. While CSCO categorized the Asian-Pacific region growth as strong, I think it looked muted and could actually strengthen a bit more in the coming quarters, from its high teens growth currently.
Again, given all the moving parts and very diverse business that CSCO now operates, my key takeaway was not the "lumpiness" experienced in the US enterprise spending but the continued bullish outlook for growth in the global service provider segment – a much larger overall segment for CSCO than the U.S. enterprise segment.
CEO John Chambers described the key drivers as the massive growth of video applications over IP, growth of IPTV specifically -- Web 2.0. This fueled network load growth exceeding 200% and with the possibility of achieving 400% growth. That kind of traffic growth is not supported indefinitely, even by amazing advances in routing, switching, and optical technologies. Thus it fuels additional sales and service growth for the bandwidth arms dealers like CSCO.
This growth in network loads is not a new thing for CSCO or any of the companies providing bandwidth services. Similar comments have been expressed by companies operating in various areas of the technology bandwidth space over the last couple of years. Yet, much of this talk is discounted and chalked up with the hyperbole of the Y2K/halcyon days of the tech bubble. The difference today is the traffic growth is real, not the inflated numbers concocted by the former WorldCom.
The move to video over IP is real and could drive network traffic growth for a number of years. A further kicker to that growth will be HD video over IP and at this point few networks have the bandwidth to handle millions of customers moving HD streams over their internet backbone. Verizon's (VZ) Fios system is possibly the only network being built expressly for this service and the cable MSO's are in the process of upgrading their networks to meet this competitive challenge. Qwest (Q) also recently talked about fiber upgrades and AT&T (T) keeps talking about spending more for its U-verse service.
Bottom line, CSCO is poised to sell a lot more equipment and services to all these players and I think continued strong (but rational) spending by the global service providers will more than offset the occasional lumpiness in U.S. enterprise spending. As stated in my Bullish Predictions on Tech piece some time ago I think a $35 level and higher is in "grid" for CSCO.
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