At first glance, Cisco Systems (CSCO) had a very impressive earnings report. However, this doesn’t mean that the company will escape the “great news, sell the news” trading reactions simply because the other great technocrats have all reported strong earnings and sold off during this earnings season. While there is a summary of just how solid the figures are, what we are most interested in is what this means for the “enterprise technology spending” that is impacting other key technology companies.
Cisco (CSCO) posted earnings of $0.40 EPS on an 8% revenue gain to $9.8 billion in revenues. This compares to estimates from Thomson Reuters of $0.35 EPS and $9.41 billion in revenues. The guidance is showing acceleration as well. The new revenue figure was put at 23% to 26% growth from a year ago, partly on acquisitions and on the datacenter build-out initiative, to a range of $10.05 billion to $10.28 billion. Thomson Reuters had $9.51 billion in revenues as the consensus. So this is great, but there are win-lose implications here for many of the other major technology companies.
If you say enterprise spending, you have to consider Oracle Corp. (ORCL) and Larry Ellison as the direct beneficiary. Oracle has already been talking up enterprise spending, and analysts have been warming up to the name with raised estimates and price targets. Maybe the Sun Microsystems deal will be as good as it projected. Do you take enterprise spending to the likes of SAP AG (SAP)? Probably not — especially if you believe Larry Ellison. Oracle claims to be winning away business and market share on all fronts against SAP. salesforce.com (CRM) is a winner though for their software as a service model, if you can stomach the excessive valuations.
What about storage and virtualization? These are obvious winners, and Cisco even named this as a win. Go right back to the EMC (EMC) and VMWare (VMW). EMC seems to be winning with the insatiable demand for storage. That is enterprise spending at its finest. Ditto for VMWare as the virtualization leader. The company recently raised guidance, and some feel that the company even kept a lid on the guidance for the coming quarter despite its positive remarks.
Hewlett-Packard (HPQ) is becoming a wild card in this analogy. H-P is now a competitor of Cisco’s. Why else would it have bought 3Com (COMS) but to keep Cisco from being able to eat too far into its IT, datacenter and server markets? Cisco has even admitted that they are a former partner who is now a competitor. H-P has done a great job with its IT consulting growth and in the PC world, yet it is still a wild card now that Cisco is going to be a dominant competitor rather than just Dell in PCs and Sun in servers. As far as IBM (IBM), they are entrenched and have enough backlog in orders to keep Cisco far behind it.
There is also the notion that Cisco’s gains may mean that competitors are having a field day as well. It seems as though Juniper Networks (JNPR) is getting back on the growth track after being derailed by the recession. Juniper beat earnings, and the guidance raise issued a week ago was very similar in nature to what we heard from Cisco. But the return to growth might not be universal in the world of routers and switching from the world’s largest telecom operators and enterprises. Take Alcatel-Lucent (ALU), for example. Sure, there is the currency issue now that it is all-French. But analysts expect revenues in 2009 and 2010 to be lower than in 2007 and 2008. If you look at the ALU stock, it just seems hopeless. After years of disappointment, why get excited now?
There were actually some cautious notes inside the Cisco call despite all the one-sided positive comments that John Chambers has given. The DSOs, or days sales outstanding, of receivables posted a significant rise. This may have been seasonal due to year-end from many customers, but the jump to 39 days was 7 days higher sequentially and 10 days higher from a year before. This can, of course, be countered with the notion that inventory turns were 11.7 in the quarter versus 11.3-times sequentially and a year ago.
We also saw that margins came in at about 64.5%, under a figure expected of 65.0%. It gets very hard to complain about margins when they are this high, but nonetheless accounting watchers are paying attention here. After a hundred-plus small buyouts, Cisco may be willing to skimp a bit on margins for more market share.
Cisco is already off of the highs, but is still up about 1.5% at $23.50 today. That 52-week high is $25.10, and analysts have a consensus price target of between $27 and $28 per Thomson Reuters mean and median data. That analyst price target will likely go up from here along with earnings and revenue estimates. Cisco’s trends offer great opportunity for some companies and huge challenges for others.
