Cisco spells out its risks and rewards

Reading a company's 10-K filing you can usually get a pretty good idea of what's going on at the company and what it perceives are its risks. Cisco issued its 10-K filing this week and along with the usual comments about risks (as is customary for financial statements) there were a few items that stood out, including Cisco's warnings of the risky business of acquisitions. 

Growth through advanced technologies
Cisco is looking to its "advanced technologies" to become "material contributors" to its overall business. Cisco refers to advanced technologies as application networking services, home networking, hosted small-business systems, security, storage-area networking, unified communications, video systems and wireless technology. It adds: "We are in the process of identifying additional advanced technologies for focus and investment in the future, and our investments in some presently identified advanced technologies may be curtailed or eliminated depending on market developments." One casualty of appears to be its optical networking products, which were removed from Cisco's advanced technologies product category during fiscal 2007.

Cisco's competitors
Cisco is feeling the pinch from the Far East. According to the filing: "In particular, we have experienced price-focused competition from competitors in Asia, especially China, and we anticipate this will continue." Are the so-called "Chisco" stores impacting Cisco's business?

Partners could also presents risks: "We also face competition from customers to whom we license or supply technology and suppliers from whom we transfer technology. The inherent nature of networking requires interoperability. As such, we must cooperate and at the same time compete with many companies. Any inability to effectively manage these complicated relationships with customers, suppliers, and strategic alliance partners could have a material adverse effect on our business, operating results, and financial condition and accordingly affect our chances of success." Ironically, this news came over the wire today: "Cisco finds that it's not so easy working with Microsoft."

R&D
Buying companies isn't the only way that Cisco seeks to expand its technologies. Cisco piled $4.5 billion dollars into research and development in fiscal 2007, up from $4.1 billion and $3.3 billion in fiscal years 2006 and 2005, respectively.

Workers
Whether acquiring people through company purchases or hiring, Cisco's headcount climbed to 61,535 staffers, as of July 28, 2007. Some 26,500 employees are located outside the United States.

Acquisitions
Acquisitions are a risky business, as Cisco has stated and it doesn't get riskier that the difficulties in integrating the business, technologies, personnel and products of large companies such as Scientific-Atlanta and WebEx, two companies that Cisco cited in this category in the filing. Also, the acquisition of Scientific-Atlanta caused Cisco to incur a debt in February 2006 when it issued and sold $6.5 billion in senior unsecured notes to fund the purchase. That was in addition to inheriting Scientific-Atlanta's patent lawsuit against Forgent Networks, which sued various Scientific-Atlanta customers. That lawsuit was settled prior to trial in April 2007. Was it all worth it?

Fastest growing markets
Cisco said its fastest growing business is its emerging markets sector.

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