Complete dominance
About 45% of Cisco's fourth-quarter revenue came from the company's switches and routers. Cisco has been diversifying beyond these businesses, but switching and routing still represent the core of Cisco. In 2015, Cisco enjoyed a 60.7% share of the switching market, according to IDC. Its nearest competitor, HP Enterprise, managed to claim just 9% of the market. A handful of smaller competitors, like Huawei and Arista, are gaining share quickly, but they remain minor players.
This dominance allows Cisco to generate exceptional profitability. During the fourth quarter, the company managed a gross margin of 63.1% and an operating margin of 26.1%. Lower-priced products from competitors haven't been able to make much of a dent in the company's market share, a testament to Cisco's pricing power. Despite new technologies like software-defined networking and cloud computing, Cisco remains the overwhelming leader in the networking hardware market.
Growth businesses
While Cisco's switching and routing businesses tend to grow slowly on average, a few of the company's segments are picking up the slack. Security is already a major business for Cisco, generating nearly $2 billion of revenue in fiscal 2016, but it's growing at a double-digit rate nonetheless. During the fourth quarter, Cisco's security business expanded by 16% year over year, aided by a handful of recent acquisitions. Over the past year or so, Cisco has added CloudLock, Lancope, Portcullis, and OpenDNS to its security portfolio.
Collaboration is another growth area, generating $4.35 billion of revenue in fiscal 2016 and growing by 9%. Again, Cisco is using acquisitions to fuel growth, adding companies like Acano and 1 Mainstream over the past year. Cisco spent a total of $3.16 billion on acquisitions in fiscal 2016, helping to bulk up areas the company hopes will produce growth for years to come.
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