Cisco’s (CSCO) message with the release of its earnings was video, video, video. The company’s set-top box operation, formerly Scientific Atlanta, contributed net sales of $752 million during the third quarter of fiscal 2007, compared with $407 million during the third quarter of fiscal 2006.
Cisco’s overall revenue rose 21% to $8.9 billion. Net income was up 34% to $1.9 billion.
The investment bet on Cisco over the next two or three years is that router and other network gear sales will rise as cable and telecom companies build out their broadband networks. As MarketWatch wrote: Chief Executive John Chambers said rising demand for equipment that allows companies and network operators to deliver video shows no signs of slowing. "Video continues to drive network demand," Chambers said in a conference call with analysts. "Momentum remains very strong."
That is all true now, but it may not be in a couple of years. The big build-outs are investments like the one Verizon (VZ) is making on fiber-to-the-home. That’s a $23 billion initiative. But, it has to be done soon, in a matter of a few quarters, or VZ’s ability to compete with cable for TV customers will begin to fade.The same is true for AT&T (T). Its plan to build a system to allow bundled voice, broadband, and TV is a $6 billion plus investment. But, that money has to be spent by the end of 2008. Otherwise it will watch cable take its voice customers and have nothing to fight back with.
DItto cable. It is still an open question how much cable companies have to upgrade their networks to offer competitive broadband. What they have is faster than DSL. And, fiber-to-the-home is super-fast, but consumers may not be able to take advantage of all that big pipe. If the telecom companies are not taking a lot of customers from cable, it is hard to imagine companies like Comcast (CMCSA) spending a huge sum to upgrade their networks just for the hell of it.
Video is nice. It is an explosion. YouTube is a big deal. So is internet VOD. But, most of what has to be in the ground to make all of this work needs to be buried in the next dozen quarters. Maybe less. Then what does Cisco do?
Douglas A. McIntyre can be reached at [email protected]. He does not own securities in companies that he writes about.
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