Cisco Systems, Inc. (CSCO) Earnings Take a Backseat to Workplace Ax

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Cisco stock - Cisco Systems, Inc. (CSCO) Earnings Take a Backseat to Workplace Ax

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Cisco Systems, Inc. (NASDAQ:CSCO) has been acting like a red-hot startup since the market lows in February. During the period, Cisco stock logged a hefty return of 36%.

Cisco Systems CSCO stock

Unfortunately, that meant it would take a lot in Cisco’s fiscal fourth-quarter earnings report to get the ball moving on CSCO. And that just wasn’t in the cards. The networking company followed up earlier speculation that it would cut 20% of its global workforce with a smaller headcount reduction, as well as a decent but unspectacular Q4 beat.

The reaction was a 1% dip in Cisco stock during the day, and another 1% in early after-hours trading Wednesday.

Cisco’s revenues came to $12.64 billion for its fiscal Q4, beating the consensus mark of $12.57 billion. Profits of 63 cents per share also were better than expected, with Wall Street looking for 60 cents.

Security offerings saw a robust 16% improvement to $540 million in revenues on the quarter. Collaboration (6%) and Wireless (5%) offerings also were pockets of strength. NGN Routing sales were off 6%, however, and its Data Center segment took a step back, off 1%.

Still, the big news of the day for Cisco was the news announced earlier: the restructuring.

Cisco Stock Dips on Job Cuts

CSCO says it will slash headcount by 7% to 5,500 jobs beginning in fiscal 2017. Earlier in the day, tech news site CRN cited sources close to the company when it reported the damage would be 14,000 employees.

RBC Capital, for what it’s worth, was hopeful about the news, releasing a statement saying that the cuts “would be beneficial to long-term operating margins.” Though they might change their tune now that CSCO has announced smaller cuts.

“While a 20% reduction (~14,000 employees) would be severe, we think a number closer to ~10,000 would be fair or in the range of 10-15% (73,104 employees as of latest 10-Q),” RBC’s note said.

Cisco’s forecast for Q1 2017 wasn’t particularly encouraging. The company projects that revenues will fall somewhere between a 1% slide or a 1% improvement. The company expects adjusted earnings to come between 58 cents to 60 cents per share.

Despite all this, the restructuring could ultimately provide a boost for CSCO stock. With the aggressive M&A, there was inevitable bloat within the ranks. What’s more, the global economic growth path has been somewhat lackluster, so Cisco needed to streamline. This has been a trend throughout big tech — Intel Corporation (NASDAQ:INTC) and Microsoft Corporation (NASDAQ:MSFT) are other sector blue-chips that have announced layoffs this year.

But something else is going on with CSCO. The company is in the midst of a strategic shift towards software technologies. That’s good news because of the thicker margins, plus the benefit of the subscription-based business model, which allows for recurring revenue streams. This has been a nice driver for cloud operators such as Salesforce.com, Inc. (NYSE:CRM).

Finally, even with the run-up in Cisco stock, the valuation is still reasonable. CSCO trades at a forward price-to-earnings ratio of 12.5, and shares yield 3.3%. This is in line with other mega tech operators like Intel Corporation (NASDAQ:INTC) and International Business Machines Corp. (NYSE:IBM).

But more importantly, the company is poised to benefit — at least over the long haul — from some key megatrends, including cloud computing, mobile, security and the internet of things. All these require trusted, high-powered networking and infrastructure technologies.

And companies like Cisco provide that.

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.

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Tom Taulli is the author of various books. They include Artificial Intelligence Basics and the Robotic Process Automation Handbook. His upcoming book is called Generative AI: How ChatGPT and other AI Tools Will Revolutionize Business.


Article printed from InvestorPlace Media, https://investorplace.com/2016/08/cisco-systems-inc-csco-earnings-job-cuts/.

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