Cisco’s Climbing, But It’s Not Out of the Woods

CSCO's core businesses continue to drag

   
Cisco’s Climbing, But It’s Not Out of the Woods

Cisco’s (NASDAQ:CSCO) lackluster 2012 was jolted to life Wednesday when news of its latest earnings report sent shares up a solid 6%-plus by midday.

But while the networking and IT giant might be back on the comeback trail, investors would be well-advised to exercise a little caution.

Cisco’s fiscal first-quarter earnings climbed 11% to 48 cents per share on revenues that grew 5.5% to $11.9 billion — both figures beat Wall Street estimates of 46 cents and $11.8 billion, respectively.

However, much of the growth came from the acquisition of NDS, which is a provider of enterprise video — but Cisco’s core businesses saw continued weakness. Revenues from switches fell by 2%, and the company also suffered a 2% drop in routers — roughly 47% of overall revenues come from these segments.

Cisco — like many tech operators throughout the Q3 earnings season — put much of the blame on Europe, where revenues declined 10%. However, the company also felt pressure from its U.S. federal business, which saw sales fall 15%.

Competitors nipping at CSCO’s heels also played a role. Juniper Networks (NYSE:JNPR) grew its revenues by 1% in the latest quarter, and even maligned Hewlett-Packard (NYSE:HPQ) has been getting traction, showing revenue growth of 6% in its networking business.

Also of concern are major rivals from Asia — including Huawei and ZTE — which have the advantages of lower costs and better access to their home-grown markets. The operators are private, so there’s little financial info available for them, but it does appear they have been aggressive on the pricing front.

Despite all this, Cisco posted strong growth rates in its next-generation businesses. For example, the wireless segment — which focuses on Wi-Fi solutions — posted a 38% increase in revenues. But the standout was CSCO’s data center business, which posted a sizzling 61% increase in revenues. Cisco is benefiting from a full-suite of software and infrastructure products that are helping to power the cloud-computing revolution.

Cisco also is looking healthy on the cash front, sporting $2.2 billion in free cash flow for the quarter — something that should please investors in CSCO for its dividend, currently yielding an attractive 3.1%.

Unfortunately, the short-term headwinds should persist for Cisco. European economies are showing a lack of progress — if not regression — and a renewed focus on the budget could mean further cutbacks in U.S. federal spending. As a result, Cisco forecasts revenue growth of 3.5% to 5.5% for the upcoming quarter.

And considering that, it’s entirely possible that Wednesday’s run-up will represent most of the gains you can expect from CSCO in the near future.

Tom Taulli runs the InvestorPlace blog IPOPlaybook, a site dedicated to the hottest news and rumors about initial public offerings. He is also the author of “How to Create the Next Facebook.” Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, http://investorplace.com/2012/11/ciscos-climbing-but-its-not-out-of-the-woods/.

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