Cisco Short Circuits After Earnings, Layoffs

by Tom Taulli | August 15, 2013 10:36 am

Someone just took the hose to Cisco’s (CSCO[1]) hot 2013 run.

Expectations got to be too much, plus the company is starting to feel the pressures of slowing global growth — especially in Asia — and CSCO decided to hit the “streamline” button in response, sparking a nearly 7% selloff in early Thursday trading.

For its fiscal fourth quarter, Cisco earnings were up 11% year-over-year to 52 cents per share, beating expectations by a penny, on a 6% increase in sale to $12.4 billion that matched the consensus forecast. CSCO also generated $4 billion in operating cash flow.

The big problem was on the guidance side — Cisco expects the current quarter’s sales to increase in a range of 3% to 5%, well off Wall Street’s expectation for a more robust 7%.

Of course, the biggest headline making the rounds today was Cisco’s cutbacks. The company announced it would be laying off 4,000 employees, which represents roughly 5% of the work force. It appears there still are too many layers in the organization, making it difficult to respond to rapid changes in technology.

On the conference call, Cisco’s CEO John Chambers mentioned several times about the challenges of the global economy. Growth rates are fairly choppy; while orders in the Americas increased 5% YOY, there was a 3% decline in Asia, including a 6% plunge in China orders.

Not that Cisco is on an island — other tech mega-operators such as IBM (IBM[2]), Oracle (ORCL[3]) and Microsoft (MSFT[4]) have felt a similar pinch.

However, CSCO has been working on righting the ship. In addition to the most recently announced layoffs, Cisco also has been getting aggressive with M&A. In July, the company shelled out $2.7 billion for Sourcefire (FIRE[5]), a top player in the fast-growing security space. The good news is that Cisco has strong DNA when it comes to mergers, and the strategy will remain key to growth.

So, are investors actually staring at a buying opportunity today?

Well, the financials are solid — Cisco still is generating plenty of cash flow, and pays a respectable dividend yielding 2.6%. All that comes for a pretty fair valuation of 11 times next year’s earnings.

All that sounds good in light of the company’s strong positions in fast-growing industries like the cloud, mobile and video. So if you’re looking for a value long-term play in tech, jump on this pullback in Cisco.

Tom Taulli runs the InvestorPlace blog IPO Playbook[6]. He is also the author of High-Profit IPO Strategies[7]All About Commodities[8] and All About Short Selling[9]. Follow him on Twitter at @ttaulli[10]. As of this writing, he did not hold a position in any of the aforementioned securities.

  1. CSCO:
  2. IBM:
  3. ORCL:
  4. MSFT:
  5. FIRE:
  6. IPO Playbook:
  7. High-Profit IPO Strategies:
  8. All About Commodities:
  9. All About Short Selling:
  10. @ttaulli:

Source URL:
Short URL: