Cisco Inc. Risk Assessment Research Assignment Paper

CISCO, INC.
Risk Assessment
2017
Anqi Qu, Xu Zhang, Hongliu Zhu
TABLE OF CONTENTS
Company Overview
Industry ………………………………………………………………6
Primary Products ………………………………………………….....6
Corporate Strategy …………………………………………………..8
Raw Materials …………………………………………………….....8
Company Size………………………………………………………..9
Sales …………………………………………………………..9
Assets …………………………………………………………11
Employees ………………………………………………….....12
Market Capitalization ……………………………………………..12
Locations.…………………………………………………………......13
Related Parties ………………………………………………………13
Primary Customers ……………………………………………….....14
Annual Report ………………………………………………............14
Image ………………………………………………………...14
Segments and Content …………………………………………….15
Cost Drivers ………………………………………………….15
Research and Development ………………………………………16
Industry Overview
Key Economic Factors ……………………………………………....17
Factors for Success of Cisco…………………………………………18
Company Life Cycle………………………………………………….20
Accounting Considerations …………………………………………21
Legal & Regulatory Matters ………………………………………..21
Social Matters ………………………………………………………22
Primary Competitors ……………………………………………….23
Personnel Turnover …………………………………………………24
Industry’s Entry ……………………………………………………..25
Management Agenda………………………………………………...25
Competitive Forces in the Industry …………………………………26
AGR Score ………………………………………………………….28
Financial Health
Financial Ratios……………………………………………………..29
Company Health…………………………………………………….32
Which Way the Company is Moving……………………………….33
Sources and Value of Capital……………………………………….33
Capital Market Place Response……………………………………..33
Quality of Earnings………………………………………………….34
Auditor Information…………………………………………………35
Perception of the Company
Equity Summary Score………………………………………………36
Stock Analyst Summary Report……………………………………...36
Other Market Considerations…………………………………………38
Auditor Considerations
Transaction Cycles……………………………………………………39
Risk Assessment………………………………………………………41
Management Integrity…………………………………………………42
Client Selection………………………………………………………..43
Audit Effort Allocations……………………………………………….44
External Control Issues…………………………………………….......44
Internal Audit…………………………………………………………..45
Expected Audit Report…………………………………………………46
Implications of Sarbanes-Oxley………………………………………..48
Client Business Matrix………………………………………………………….48
SWOT Analysis……………………………………………………………........50
Appendix
Budget……………………………………………………………………52
Leadership………………………………………………………………..52
Coordination……………………………………………………………...52
Norms……………………………………………………………………..53
Conflicts…………………………………………………………………...53
Team Member Contribution……………………………………………….53
Instructions…………………………………………………………............54
Other Accomplishments……………………………………………............54
References…………………………………………………………………………..55
COMPANY OVERVIEW
J. CISCO Inc. Industry
Cisco is the world’s leader in data-networking equipment and software provider. It provides a wide range of communications and services. It is the largest supplier of Internet Protocol (IP) networking equipment and high-performance internetworking systems. It operates in four segments: Routers, Switches, Advanced Technologies, and Services. Routers represent the devices that enables communication of data over the internet. They include core routers, edge routers and enterprise routers. Switches represent those devices that are used to build networks over areas. The Advanced Technologies is categorized into six subcategories. They include: IP Telephone, Home Networking, Wireless, Security, Storage Networking and Optical Networking. Service provision represents consultancy to network users as well as financial services.
Primary Products
At the beginning, Cisco’s primary router was internetworking router, a hardware device that automatically selects a route for data flow between networks. The routers supported multiple protocols and linked different kinds of networks. It later diversified into different segments that covers many industries. The company is able to provide its customers with different products that has the capacity to satisfy their needs.
Cisco’s Routers segment is responsible for providing customers with hardware devices that can be used in communication over the internet. The router product portfolio consist of Core Routers that are used to communicate within a network; Edge Routers that are used for communication between various local networks; and Enterprise Routers that are only available for large organizations and are sold on long term and large agreements.
The company’s Switch segment is responsible for providing switching solutions to data centers, big enterprises and small business as well. This solutions are helpful to various industries including, financial service providers. The switch product portfolio include: blade switches, data center switches, industrial Ethernet switches, InfinBand switches and many more.
Cisco’s Advanced Technologies segment is responsible for a wide range of services through its products. As stated earlier, this segment is divided into six subcategories. They include: IP Telephony which is responsible for the transmission of voice communication over IP networks. This is available for organization that want to have internal communication between departments. Home Networking sets up and protects home and multimedia networks. The wireless subcategory is responsible for enabling customers to connect to networks wirelessly. The product portfolio in this subcategory include: wireless routers and accessories.
Cisco also offers financial services through its Cisco Capital to its clients depending on their needs and country regions. This services assists other companies that wants to acquire other companies with the necessary capital they need and other customers that need large financing for large purchases. It also provides financing for equipment that incorporates its Cisco’s products and services. It also provides financing to its dealers as well.
Also, J. Cisco Inc. also offers a wide range of services to its customers. They include technical support to network users and other advanced services such as financial and consultancy services.
Corporate Strategy
J. Cisco Inc. is dedicated to innovation as the only way to provide products and services that meet the needs and preferences of its customers. It also takes this strategy seriously since it ensures growth and sustainability in the market. The company’s mission is to “Shape the future of the Internet by creating unprecedented value and opportunity for our customers, employees, investors and ecosystem partners.” The driving force behind Cisco’s continued success throughout history is its acquisition of several companies across the globe. This acquisitions have allowed the company to expand and adapt new trends that are in line with consumer needs and preferences. Cisco is the largest and industry leader in internet working providers and is consistent with sustainability principles.
Raw Materials
J. Cisco Inc. sources both of its raw materials and finished components from both local and international suppliers. The organization contracts external manufactures to manufacture the equipment it needs to produce its products. Mostly it contracts fabless semiconductor manufactures to manufacture the chips for them. However, sometimes the contracted semiconductor manufactures designs the semiconductor chips and outsources specialist manufactures to manufacture the chips. The specialist manufactures then outsources the raw materials from either local or international suppliers depending on the needs of the chips that are to be manufactured. Once the chips and other components have been manufactured, they are then distributed to the contracted manufactured when they are required and they are ready for assembling according to Cisco or supplier specifications.
Consequently, Cisco purchases a wide range of good and services that it uses in its production, offices, logistics and product development process. Therefore, the organization maintains an integrated sourcing model for its growth and sustainability. The suppliers are expected to deliver raw materials and components in time and observe industry standards of quality. Since it engages a lot of suppliers, it uses several agreements to protect its intellectual property and against other risks.
Cisco Systems Inc.’s raw material have been fluctuating from time to time. In 2014 its annual raw materials increased from $315 million to $367 million in 2015. However, this declined in 2016 $345 million in 2016. This increased through the last quarters of 2016 to $428 million in January 2017. The image below shows the historical data of Cisco’s raw materials. From the data, it is evident that the raw materials changes from quarter to quarter. This might be due to the market demand for certain products which dictates the amount of raw materials the company needs.
Size of the Company
Sales
Cisco’s sales has not been steady through its history. It has been declining and increasing due to market trends. The chart below shows the company’s revenue trend by products and service. For the fiscal year ended July 2016, its annual revenue increased by 0.17% to $49,247 million from %49,161 in 2015. This revenue performance shows a slow down as compared to 2015 which was 4.28%. The images below shows Cisco Systems Inc.’s revenue growth trends
The chart below presents revenue and sales by product category and service.
Assets
In the financial year that ended in July 2016, Cisco’s assets totaled $121.6 billion with much of it coming from investments, goodwill, accounts receivables and deferred tax assets. Since 2012, Cisco’s assets have been increasing steadily from $91.8 billion to $121.6 billion. In the fiscal year that ended July 2016, Cisco’s assets growth rate was 4.10%. In the past three years the rate was 3.40% and 6.00% for the past five years. The total assets of a company are connected to ROA . For the quarter that ended January 2017, Cisco had a ROA of 7.4%. The image below shows that Cisco’s assets have been increasing steadily.
Employees
The success of any organization is dependent on skills and commitment of its employees across the globe. Cisco has a total number of 71,883 employees all over the world. The employees are committed to ensure that the company achieves its objective of shaping the future of the internet by creating value to all of its customers. Cisco’s diversity and culture is essential to its image and reputation.
Diversity: The Company believes that as much as it values its customers views, those of its employees are equally important as well. The employees provide a variety of opinions and perspectives, which enhances their cooperation with its customers.
Benefits: The Company offers a variety of benefits and perks to its employees. Some of them include: health insurance, wellness programs and employee assistance programs.
Market Capitalization
The current market cap (value of the stock multiplied by outstanding shares) of Cisco is $171.57 billion, which is much higher than that of its competitors Juniper Networks Inc., F5 Networks Inc., and Arista Networks Inc., which have market caps of $10.8B, $9.2B and $8.5B respectively. At the end of the periodic year ended July 2016, Cisco’s total shareholder’s equity was 63.5B, this was an increase from the previous two years. The market cap of a company is dependent on the price of the common stock thus it changes on a daily basis. The chart below shows the company’s market cap since 2013 to 2017.
Locations
Cisco Inc. was founded as a family company in San Francisco, California in 1984. It has its headquarters in San Jose, California. It has its operations in more than 85 countries with more than 372 locations across the world. Currently, Cisco serves the following six areas around the world: Asia Pacific, North America, Europe, Africa, Latin America and Middle East. Some of the countries where it has established its operations include: China, India, Japan, Denmark, South Africa, Singapore, Spain, Egypt and many more.
Related Parties
Cisco’s Board has affirmatively implemented a policy that governs any transactions involving both the company and any of the directors, executive officers or their relatives within a calendar year. In the policy, the Board has defined who an independent director is and who is not in accordance with NASDAQ. According to the Board, a member of the Board of Directors is not independent if at any time in the past three years was employed by Cisco.
The Board of Directors takes into consideration financial, commercial, charitable services and other transactions and relationships between the company and directors or relatives and affiliated entities. The Nomination and Governance Committee reviewed that any transactions by an independent director or affiliated entities with the company should not exceed 1% of its revenue. The Committee also recommends that any transaction by the non-independent directors or their affiliated entities should not exceed NASDAQ’s objectives and standards nor should they interfere with their independent judgement in carrying out their responsibilities as directors.
Primary Customers
Cisco’s distributors sell to enterprise companies that has more than 1000 employees, small business with less than 1000 employees as well as service providers for video, data, and other communication purposes across the globe. The distributors are not owned by Cisco and are located all over the world. They are responsible for sales, maintenance, and repair and parts distribution to the end users of Cisco’s products and services.
Annual Report
Image
Cisco’s annual report is an extensive report that describes its business tasks and activities and its position in the industry. Throughout its annual reports, Cisco attempts to explain how it is on top of its competitor. Cisco perceives itself to be at the peak of the pyramid in the technology and communication industry. It is always determined to creating new products and services to meet the preferences and needs of the customers.
Segments and Contents
Cisco’s annual report is divided into various segments with each focusing on different content and other important information about the organization. Cisco includes a section that discusses its accounting procedures to demonstrate that is follows the Generally Accepted Accounting Procedures (GAAP) in the report. Moreover, the report contains a summary sections that highlights what the report contains. Cisco refreshed the format of its 2016 annual report by adding contents that are important to its shareholders and other stakeholders.
The report is divided into four parts. The first part focuses on the general activities of the organization such as the industry in which it operates, its products and services, nature of the market competition and its employees. It also discusses the risks and uncertainties that can affect its operations. The legal issues facing the organization as well its properties are discussed in this part. Part two focuses on equity and other stockholder related issues. It is in this section where the company discusses the performance of its stock in the stock exchange market. Another area that is included in this section are the management’s discussions, analysis of the financial data and the results of its operations. The comprehensive and consolidated financial statements of the organization are provided in this section as well as the notes to the financial statements. In general, this section focuses on the general accounting issues of the organization. Part three focuses on the management of the organization while part four provides exhibits to the financial statements and signatures.
Primary Cost Drivers
Cisco does not provide a detailed information about its primary cost drivers in its report. However, it can be deduced that its basic cost driver is customer demand. Without customer demand, most organizations will not be operating; therefore, without customer demand for the Cisco’s products and services, the going concern principle cannot be applicable to the company. In serving its customers, Cisco’s management undertakes various decisions and actions that are aimed at satisfying customer demand which drives costs in the organization. Another cost driver is innovation and technology that is guided by its strategy of leading its customers in their digital transition by providing them with secure solutions that can connect with anything that can be connected. This is aimed at helping their customers gain a competitive advantage through digital transformation. Cisco believes that technology and innovation is the deciding factor in the industry.
Research and Development
Research and development is the only way through which new technologies and innovations get into all sectors of the economy. It creates more effective products and services that meets the needs and preferences of the market at the time. Each organization has its R&D interest areas depending on the industry or sector. Cisco is determined to innovative technologies and is much interested in R&D. Cisco is interested in exploring those issues that are relevant to its activities. It is mainly interested in adjacent technologies that take the network to their advantage to change the world. It is mainly interested in the following areas: networking, hardware and security. It has partnered with developers from the government, academic industry partners and customers with the aim of exploring new technologies. Despite the ever changing market dynamics, Cisco continues to invest in the future to meet the growing demands of the customers.
INDUSTRY OVERVIEW
Key Economic Factors
The internet has brought a new wave of prosperity around the world. It has become an integral part to the lives and a source of opportunities to many people across the globe. It has its benefits as well as consequences to the world as whole. For example it has improved the lives of people and how people are working all over the world and it is a source of threats to the security of people as well. It can be argued that the internet has hit a wall with both good and bad consequences. The cyber-attacks and network hackers are the drivers for the new digital divide between the save internet with secure security measures and the free but dangerous network connection.
It is evident that the future of the internet is being driven by some dynamics that can be seen today though there are some features that can be confidently counted on. A change in the global internet market structure will occur is expected to occur in the future due to the following factors. First is the economic growth between the advanced countries and the emerging ones. The economic growth gap between the countries is expected to decline significantly and persistently. Second is the growth pattern in the emerging countries. The growth pattern is expected to expand rapidly in the middle classes increasing the numbers and purchasing power of internet services. The third factor is the increase in internet usage in the emerging countries. Although the number of people requiring internet services and broadband connections will increase in the emerging countries, internet usage in advanced countries will reach a plateau due to aging population and slower economic growth.
The above three factors can be summarized in a metric called “Internet economy” which can also be referred to as the purchasing power of internet users. A decade ago, advanced countries accounted for more than 70 percent of the internet economy. This has been declining and the emerging countries are increasing their share due to their rapid economic growth. This is motivated by their desire to “catch up” with internet use.
Factors for Success of Cisco
Cisco’s road to success has not been smooth, it has faced a lot of challenges. For a long time, Cisco has been recognized...