The world's largest maker of networking equipment, Cisco Systems (CSCO- Free Cisco Stock Report), performed largely as expected in the April period with a 5.1% revenue gain matching our estimate and in-line earnings per share of $0.33.
However, Cisco abandoned its aggressive 12%-17% long-term revenue growth target and gave flat July-quarter guidance amid recent market share losses in certain emerging product categories (application delivery controllers) and core markets like ethernet switching. Heavy municipal budget cuts are also putting a damper on the company's near-term outlook. Investors reacted strongly to the disappointing news, prompting the stock price to decline some 5% on the day following the after-market earnings release.
Looking at the April period, Switching revenues declined 9% year over year as a competitive decision to incorporate high-end technology into less expensive switches is leading to lower average selling prices. The routing segment did better, advancing 7%, as telecom carriers continue investing in backbone infrastructure to keep up with escalating bandwidth demand. New products were up 15% and the Nexus line of data center switches performed particularly well.
Management has been candid about its weak execution and disappointing earnings performance over the last five quarters. Spreading responsibility over more people, in an effort to penetrate new markets, appears to have slowed development and reduced executive accountability. In an effort to remedy this, the company said it cut the number of people on boards and councils by two-thirds, or around 500 spots. Further job reassignments and operational restructuring initiatives are forthcoming, since Cisco plans to reduce headcount as decisions regarding which businesses to exit are reached. The company already intends to sell its Flip HD video service and we expect more divestitures related to the underperforming consumer business going forward. These adjustments should allow the company to remove $1 billion in costs during fiscal 2012 and help margins rebound.
The company will reveal more details about its revised operating model and long-term growth expectations in September. We expect the shares to languish in the interim as investor confidence in Cisco's ability to compete on pricing, technology, and sales execution is very low at present and there are few catalysts on the horizon.
About The Company: Cisco Systems Incorporated is the leading supplier of high performance internetworking products for linking local-area and wide-area networks of computer systems. Products include routers, LAN and ATM switches, dial-up access servers, and network management software. The Cisco IOS software platform ties these products together, delivers network services, and enables networked applications. Foreign business accounted for 49% of 2010 revenues. R&D was about 13% of revenues.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.