Cisco slammed on poor outlook

But don't think the tech sector is doomed. The company and its CEO are looking for scapegoats.

By InvestorPlace May 10, 2012 11:48AM

By Jeff Reeves


Cisco (CSCO) took a spill Thursday on poor earnings after the bell Wednesday. As of this writing, CSCO shares were off as much as 9% in early trading because of a poor fiscal-third-quarter report.


The big reason is that Cisco CEO John Chambers dropped a bombshell, saying reluctant customers are waiting longer to close deals and spending less money. He revised down earnings and revenue forecasts for the tech giant's all-important fiscal fourth quarter, and investors panicked.


Cisco is clearly hurting. But don't read too much into the numbers. One bad report from CSCO doesn't necessarily spell trouble for other tech stocks, or signal that global economic problems are getting too big to handle.


Chambers' exact guidance for CSCO was that revenue for the current quarter, which runs May to July, still will increase -- it's just that it will squeak up by only 2%, versus 5% from the same period last year. Analysts were looking for a healthy 7% increase, so obviously the shortfall was very disappointing. Revenue also was revised down from 46 to 44 cents a share, vs. forecasts of 49 cents for the next quarter.

Yes, that's all very bad news. Yes, you can understand why investors are punishing Cisco. But before you think this is a sign that all tech stocks are doomed, consider these three things:


Slow Growth, Not No Growth

Cisco didn’t say growth had stopped -- just that it was slower than expected. That’s cold comfort for CSCO shareholders, to be sure, but it proves the pie is indeed getting bigger. Also encouraging is that gross margins widened from 61.9% to 61.3%. The details also show that Asia Pacific, Japan and China markets saw 24% growth -- signaling clear opportunities, if Cisco can just focus overseas. And despite all the negativity, top-line growth in the Americas was 3.2%, and in Europe, Africa and the Middle East it also increased to the tune of 4.6%. There is a bigger pie here, clearly. If Cisco isn't getting a bigger piece, however, that's not a bad sign for the entire industry.


Cisco Is in Unique Transition

Chambers and CSCO would love for us to think that the shortfall is because of circumstances beyond their control. But let’s admit that Cisco is very much a company in transition, after killing about 9% of its workforce and shutting down consumer-focused operations like the Flip camera and cable TV box manufacturing. Last year, it was estimated that Cisco trimmed about $1 billion in its annual expenses. This kind of corporate upheaval is not representative of the entire sector, so be careful before drawing clear comparisons between Cisco and the rest of tech.


Looking for Scapegoats

Pundits and cranky investors have been calling for John Chambers’ head for a while. Yes, from 1991 to the mid-2000s it was a good run. But Cisco has been struggling for years now. The unsuccessful consumer products and lack of focus on enterprise spending allowed competitors like Juniper (JNPR) and Alcatel Lucent (ALU) to gain ground. After the massive restructuring at Cisco was announced, Chambers tried to admit mistakes by saying "we were fat" and plotting a new course.


But while instituting the first Cisco dividend in 2011 and dishing out $5 billion for a pay TV software firm make good headlines . . . they don’t change the long-term trajectory of the company. Call me a cynic, but Europe seems like an all-too-convenient scapegoat for why CSCO isn’t doing as well as it should right now.


I’m not saying that couldn’t be a slowdown in business spending related to economic uncertainty. Other tech stocks may indeed feel some pain. And I’m certainly not suggesting that CSCO is a buy on the dip. The company still is up significantly from its 52-week low of around $13, set last summer, so don’t think we’ve seen a bottom yet.


But it’s worth noting that one company’s results are just one company’s results. A host of tech companies are doing good things right now and finding bigger business contracts.

Cisco just isn’t one of them.



Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at editor@investorplace​​.com or follow him on Twitter via @JeffReevesIP. As of this writing, Jeff Reeves did not own a position in any of the aforementioned securities.




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2Comments
May 10, 2012 3:15PM
avatar

Well yes it is time for Mr Chambers to leave - no leadership and often just open promises the board should wake up and remove him at once. Own stock in Cisco then let it be known we need a new direction and John is definitely not the one to lead as should have been noted from his past failures.

 

Enough time had passed he is not moving the company in the right direction write the board and let your feelings be known

May 10, 2012 3:27PM
avatar
Chambers has lost it.  Like many mature tech companies, Cisco is sitting on a pile of cash, but instead of using it to pay a decent dividend, they blow it on questionable acquisitions and buying back their own "undervalued" shares. Increasing the dividend would have a much greater impact on the share price. I understand why fast growing companies don't pay dividends, but when the growth rate slows, they need to refund their excess cash to the shareholders.


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