Don’t Write Off Whole Tech Sector Just Because Cisco Sucks

by Jeff Reeves | May 10, 2012 10:18 am

Don’t Write Off Whole Tech Sector Just Because Cisco Sucks

Cisco (NASDAQ:CSCO[1]) is taking a spill today[2] after poor earnings after the bell Wednesday. As of this writing, CSCO shares are off about 8% in early trading because of a poor fiscal third quarter report from the tech giant.

The reason? Cisco CEO John Chambers dropped a bombshell that reluctant customers are waiting longer to close deals and spending less money because of growing global economic uncertainties. He revised down earnings and revenue forecasts for the tech giant’s all-important fiscal fourth quarter, and investors panicked.

Not just because that means bad news for Cisco stock, but because other enterprise technology companies like Juniper Networks (NYSE:JNPR[3]), Alcatel Lucent (NYSE:ALU[4]) Red Hat (NYSE:RHT[5]) and others might feel the pain too if businesses are indeed tightening their belts.

The Dow also is taking a spill, as Cisco is one of the 30 components in the average and thus is creating a drag on the index.

But don’t make the mistake of reading too much into Cisco, and ascribing it some huge importance as a bellwether for tech. This is just one earnings report for one company, and not a canary in the coal mine.

Chambers’ exact guidance[6] 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 a bad sign. But here are three things to consider:

Slow Growth, Not No Growth: Cisco didn’t say that growth had stopped altogether — 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 Americas was 3.2%, and the Europe, Africa and Middle East region also increased to the tune of 4.6%.

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 work force and shutting down consumer-focused operations[7] 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 and Alcatel Lucent to gain ground. After the massive restructuring at Cisco was announced, Chambers tried to admit mistakes by saying “we were fat”[8] and plotting a new course forward. But while instituting the first Cisco dividend[9] in 2011 and dishing out $5 billion[10] 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 there couldn’t be a slowdown in business spending related to economic uncertainty, 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.”[11] 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.

Endnotes:
  1. CSCO: http://studio-5.financialcontent.com/investplace/quote?Symbol=CSCO
  2. taking a spill today: http://investorplace.com/2012/05/cisco-misses-on-q4-outlook-shares-plummet/
  3. JNPR: http://studio-5.financialcontent.com/investplace/quote?Symbol=JNPR
  4. ALU: http://studio-5.financialcontent.com/investplace/quote?Symbol=ALU
  5. RHT: http://studio-5.financialcontent.com/investplace/quote?Symbol=RHT
  6. exact guidance: http://online.wsj.com/article/BT-CO-20120509-721014.html
  7. shutting down consumer-focused operations: http://investorplace.com/2011/04/cisco-starts-shoveling-its-consumer-mess/
  8. “we were fat”: http://www.enterprisenetworkingplanet.com/netsysm/cisco-ceo-we-were-fat.html
  9. first Cisco dividend: http://investorplace.com/2011/03/stock-dividend-increase-cisco-csco-hpq-hp-apd-ash-fult-jah-pdco-wsm-xlnx/
  10. dishing out $5 billion: http://www.slate.com/blogs/breakingviews/2012/03/15/cisco_acquires_nds_group_is_john_chambers_back_to_making_reckless_deals_.html
  11. “The Frugal Investor’s Guide to Finding Great Stocks.”: http://www.amazon.com/dp/B007KB9CSI/ref=rdr_kindle_ext_tmb

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