Cisco reported its quarterly earnings yesterday and the ripple effect from the financial community is still be felt today with the stock rebounding from being down almost 10 percent in overnight trading to down about 6 percent mid-day today. Because Cisco is a tech bellwether it is in no small measure responsible, along with the increased volatility in the Middle East, for the stock market taking a bit of a haircut.
The reason why Cisco’s results are helping drag down its price and that of others in the sector is not about the numbers for the quarter. It is more about the fact that they announced a force reduction of 4,000 jobs, and tempered their view on prospects going forward.
The particulars were that for the company’s fiscal fourth quarter, it reported a net profit of $2.3 billion, or 42 cents a share. That compares with $1.9 billion, or 36 cents, in the year-ago period. In addition, revenue rose 6.2 percent to $12.4 billion. Why these numbers are not really driving the stock price down is because Cisco’s adjusted quarterly earnings of 52 cents per share beat analysts' estimates by a penny.
The context here is that Cisco’s stock has been on a roll, up 30 percent since it last reported until yesterday. One could speculate that it was due for a correction, but what displeased analysts and investors was not just the lay-offs but the new guidance which says revenue growth will slow for the current quarter. And, since the stock market is all about what will you do for me tomorrow, discounting the present quarter’s results was inevitable given the not so great news going forward.
Chamber’s take on the road ahead and the layoffs
Cisco CEO John Chambers, in discussing the results and the layoffs, had a few interesting observations. The first was that he believes the inconsistency of demand based on regional results is a reflection of the fact that while overall things are improving slowly, around the world they are doing so in starts and stops and “nowhere near the pace they we want.” He could have added, that it is not at a pace anyone wants, and the company’s sluggish results in Asia are certainly a reason for everybody in the industry to be cautious.
In fact, despite meeting expectations and growing profits for the quarter, “caution” would be a good word to use in his statement about the layoffs: "Now if we are going to lead in this industry, the one thing I have learned over the years is you have to be the first mover…We have to very quickly reallocate the resources .... Those need to be done with small teams. We just have too much in the middle of the organization. Indeed, this is not the first time Cisco has done what some might call fine-tuning to its workforce to adjust to changing market realities. It lopped off 500 jobs in March following a 1,300 reduction about this time last year.
Analysts were quick to pounce on the layoffs as being an indicators of “softness in the pipeline.” In fact, piling on seemed to be the order of the day in doing post mortems as analysts sought to explain to investors what was going on. These included observations about Cisco having a “mature” product line with the implication that this meant their addressable market was shrinking just as competition from the likes of Huawei, Juniper and others was intensifying. Funny how these same factors were in place last quarter yet the stock spurted up. We live in an age where things change quickly but hardly in 90 days which makes this circular logic hard to square.
There was also an interesting observation in USA Today from Edward Zabitsky, an industry analyst and CEO of ACI Research, who said the cloud was causing disruptions for the company and its competitors based on delays in orders as customers test new network designs and the deals are smaller in financial terms. In the wake of the NSA scandal, it appears that companies are going to rely more on private clouds than public and hybrid ones. They will also need assistance and support in designing and implementing their datacenter network and storage transformations, also well as become more intensely focused on security. All of these are areas where Cisco has deep expertise, including in the security area which has become the focus of a major company push. That sounds bullish rather than bearish when evaluating Cisco’s prospects and not “disruptive,” even conceding the point that short-term the need to test and validate new architectures takes time and can impact orders.
As I have stated many times, I am not a stock analyst and make zero pretense about being a source of investment recommendations. What I do know is that there is a big difference between the interests of traders, who pushed Cisco into the ranks of being one of the top shorted stocks even before the results were announced, and those of longer-term investors.
Cisco is a big company, with lots of people and products. That translates into a need to adjust to the pace of the market and deploy resources in places where management feels it can best maximize shareholder value over the longer-term and not just for the sake of day traders and fund managers working off of trading algorithms.
It is for this reason that the message from the Cisco results is actually not one but a few, and they are mixed. This is an instance, as usual, where perception is reality. That is why restructuring, usually viewed by Wall Street as a good thing, became a bad thing. It is why “disrupted” technology that Cisco is helping deploy around the world somehow became a liability rather than an asset. It is why turning a profit and basically hitting one’s number in a challenging economic environment was viewed as insufficient.
It seems the real message of the day is for investors, buyers and sellers to beware. The real test will come in the next quarter, which is usually a strong one, to see what turns out to be directionally correct.
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