THE TIMES 100 / THE BEST PERFORMING COMPANIES IN AMERICA : THE BOTTOM LINE : Networking Has Tied Things Up Nicely for Cisco Systems : There don’t seem to be enough superlatives to describe the maker of computer routing boxes, which has a stock market value of $8.6 billion.
Haul out all the cliches about Silicon Valley’s abundant success stories and they still won’t do justice to Cisco Systems Inc.
Less than 10 years old, the sibilant manufacturer of computer networking gear cries out for new superlatives to describe its achievements: a routine doubling of annual sales and profit, four stock splits in as many years, extraordinary productivity ($500,000 per employee), a rocket-like ascent among investors.
Little wonder that Cisco perches near the top of three of The Times 100’s key measures of corporate performance in 1993: fourth in two-year return on equity, sixth in sales growth and 12th in market value. As of April 8, the company’s $8.6-billion stock market value, half again as large as last year’s, shoved it ahead in its value to investors of much larger California stalwarts, including Gap Inc., Unocal Corp. and Wells Fargo & Co.
Cisco’s feats are all the more remarkable given that its name is unlikely to crop up in household chatter. The company makes routers--boxes of varying size containing software that links disparate groups of computers, a technology of increasing importance given the emphasis on inter-networking.
“Cisco hit the wave perfectly,” said Donald T. Valentine, chairman of Cisco and general partner with Sequoia Capital, a venture capital firm that invested in Cisco. “It had the product needed and wanted by the market.”
Back in the 1980s, companies began to replace systems using giant mainframes and simple video display, or “dumb,” terminals with groups of personal computers that could communicate with one another. A problem soon arose: A group of IBM-compatible PCs could not hook up easily with, say, a network of Apple Macintoshes or a bunch of Sun Microsystems workstations.
Enter Leonard Bosack and Sandra Lerner, computer networking technologists (and spouses) from Stanford University. With three like-minded friends and funds borrowed on their credit cards, they founded Cisco (named for that cosmopolitan neighbor to the north, San Francisco) to develop and build one product. This router would speak several computer languages and thus connect a company’s various networks, whether from across a room or across an ocean.
Think of a computer network as a congested freeway. Cisco’s data delivery technology determines the best route for information to travel.
Since its founding, Cisco has sold more than 150,000 routers, ranging in price from $2,000 to $100,000. That range has broadened as companies have clamored for more affordable devices on the low end and more powerful ones on the high end. Cisco dominates the high- and mid-range markets but has recently begun pushing into the low end, where most of the sector’s growth is expected over the next few years.
Three of every four Fortune 100 companies use Cisco’s technology. Customers include Wal-Mart, Aetna Insurance and NASA.
When aircraft giant Boeing set out to design its new 777 jet entirely on computers, it bought Cisco routers to connect thousands of computers, printers and other devices.
Cisco, which went public in 1990, controls half the global market for routers, which in 1993 soared to $1.9 billion from $1 billion the year before, said Rebecca Thompson, an analyst at Dataquest, a San Jose market research firm.
Wellfleet Communications Inc., Cisco’s nearest competitor, has 10% of the U.S. market compared to Cisco’s 44%.
Having outgrown offices in Menlo Park, where Cisco assembles the routers, the company is relocating to a six-building complex 10 miles south in San Jose. John P. Morgridge, president and chief executive, admits to being leery of the Silicon Valley jinx of high-flying companies moving into handsome new quarters and suddenly finding themselves in trouble.
The saving grace, Valentine said, is that these buildings are “plain vanilla,” with no fancy swimming pools.
Morgridge, a lean man who jogs daily, topped a recent Business Week list of executives who give shareholders the most for their money. His pay over the last three years totaled $967,000--a pittance by the standards of CEOs of most big companies.
But keep this in mind: When Morgridge took the job six years ago, he exercised options to buy Cisco shares at 3.3 cents each. What cost him $25,000 then is now worth about $177 million.
In 1993, Cisco’s sales leaped to $928.2 million and net income soared to $241 million. Both represented near doublings of the previous year’s levels. The payroll has grown to more than 2,000 from 300 three years ago.
Despite its current dominance, Cisco faces big challenges in a fast-changing environment. Key will be making headway with low-end products in such competitive, price-conscious markets as schools and homes.
Perhaps the biggest problem will be striving to meet investors’ inflated expectations. Cisco realizes that its stellar performance of recent years will be a tough act to follow.
Most analysts expect the company to continue its strong growth, if at a somewhat slower pace. And Morgridge contends that Cisco is always glancing over its shoulder.
