CSCO Stock, Chambers Take a Beating on Q2 Cisco Earnings

Cisco not lacking for vision, but the execution is absent

   
CSCO Stock, Chambers Take a Beating on Q2 Cisco Earnings

Investors didn’t expect much from Cisco’s (CSCO) earnings for the fiscal second quarter.

Cisco185 CSCO Stock, Chambers Take a Beating on Q2 Cisco EarningsIn that respect, they weren’t disappointed.

CSCO stock was slipping today following a lackluster Cisco earnings report. For Q2, Cisco earnings came to 47 cents per share on revenues of $11.2 billion; both figures barely edged out expectations for 46 cents and revenues of $11 billion.

That stumble over the limbo pole sent CSCO stock down by roughly 5% in morning trading.

In the quarter, CSCO earnings came to 47 cents a share on revenues of $11.2 billion. The analysts’ consensus was for a profit of 46 cents and revenues of $11 billion. So even with a low-bar, it was tough for company to show much improvement — and of course, this is a big reason CSCO stock is in the sell mode, once gain.

Cisco Earnings: Holes Aplenty

Cisco earnings weakness has been a problem for some time, and CEO John Chambers has indicated that he is working hard on restructuring the company. However, most of the company’s success has come on the cost-cutting side. And in fairness, that has shown up in strong CSCO cash flows. During the latest quarter, EBITDA came to $3.71 billion, which was above the Street forecast of $3.65 billion.

But if Chambers wants to get CSCO stock back into gear, he needs to find ways to pump up the top line, which is struggling mightily. The $11.2 billion reported in Cisco’s second quarter reflected a grueling 7.8% decline year-over-year, and worse CSCO is predicting a sales decline between 6% and 8%.

What’s most troubling for CSCO stock investors is the continued pressure on Cisco’s core business of switches and routers. On a year-over-year basis, Cisco suffered a 12% YOY decline in switching revenue, as well as an 11% drop in the Next-Generation Routing division’s sales.

Competitors including Juniper Networks (JNPR), Hewlett-Packard (HPQ) and Alcatel Lucent (ALU) are clearly taking a toll by matching the technologies but at lower prices, and Chinese-based Huawei has been extremely aggressive on its terms with customers.

Boding poorly for Cisco’s longer-term prospects is the fact that the broader industry is undergoing a seismic change as companies such as Google (GOOG), Facebook (FB) and Apple (AAPL) have built their own networking technologies to create cheaper infrastructures. So if the erosion continues in switching and routers, CSCO stock remain dead money for the long haul.

So how will Cisco make up for the shortfall? That’s the multibillion-dollar question.

While it’s true that CSCO has been strong with mobile, security and data centers, these businesses are still relatively small. Plus, other segments are showing weakness and weighing on CSCO stock. For example, the Cisco earnings report showed that revenues in the collaboration business — where CSCO faces competitors including Microsoft (MSFT) and Polycom (PLCM) — fell by 7% in the quarter.

Another headwind is the turmoil in emerging markets. Orders in the BRIC countries (Brazil, India, China and Russia), as well as Mexico, fell by 10% in the second quarter. This was after orders fell 21% in the prior quarter. And while the region itself has seen a deceleration in growth, another possible factor might be a reaction to the NSA scandals. In light of the recent revelations of the U.S. agency, EM governments could be pushing back on American technology providers.

Any Hope for CSCO Stock?

To engender some optimism, on the Cisco earnings call Chambers touted his grand vision of the “Internet of Everything,” where traditional devices such as toasters and alarm clocks are connected to the cloud. And while it should be an enormous opportunity, Chambers has had a tough time getting Cisco to capitalize on this megatrend.

Twitter is abuzz today with calls that Chambers should head for the door, and at least based on performance, it’s hard to make a case against. The harrowing numbers via Jeff Macke:

And in the past five years, CSCO has returned a meager 8% annually with dividends vs. 19.4% for the S&P 500.

This is not to imply that the company is doomed. CSCO stock very well could have bottomed out — after all, while investors have had plenty of bad news, they’ve also had plenty of time to factor it into CSCO’s valuation.

Meanwhile, Cisco also generates strong cash flows, and the dividend currently yields an attractive 3%, all of which should help provide a little support.

But “a little support” isn’t a reason to buy. Investors looking for meaning capital gains should look away from CSCO stock and toward other opportunities.

Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO StrategiesAll About Commodities and All About Short Selling. 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/2014/02/cisco-earnings-csco-stock/.

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