This Networking Giant Looks Great for the Long Haul
Keki is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Networking equipment behemoth Cisco (NASDAQ: CSCO) recently released its fourth quarter result which turned out better than what analysts had expected. The company has certainly succeeded in turning around its operations after reporting a string of year on year declines in net profit during the past. The correct blend of rightsizing, value acquisitions, and competitive pricing of its products seem to have translated into a winning combination.
So how were Cisco’s results? Lets take a brief look at the numbers....
I just love the way Cisco managed to beat expectations both in terms of top and bottom line growth despite a challenging economic environment. And even though it did not increase its earnings forecast, shareholders did get a great reason to cheer in the form of a handsome 75% raise in dividend payout. This sent the company’s stock price soaring more than 8% last week.
Cisco managed to post a 4.4% rise in fourth quarter revenue to $11.69 billion mainly on the back of strong domestic sales. Though European operations continued to remain weak with revenue declining on a sequential basis.
Net profits rose by an even more remarkable 56% to $1.92 billion. Operating expenses fell with significantly lower restructuring charges. Revenue from physical products increased by about 2.6% and its services segment saw a 12% jump in revenue. All in all, things seem to be looking great with the exception of Europe for obvious reasons.
Going lean and mean...
Cisco has been pretty darn active with acquisitions. Last month it bought privately held company Virtuata which deals in security software – a great add on for securing Cisco’s virtual machine and cloud computing products.
But while Cisco has been making valuable additions to its business it has also made sure that it cuts corners wherever necessary. This is evident from the fact that the company has cut about 7,800 jobs and has closed redundant businesses that were pulling it down.
In the earnings conference call, Cisco’s chief executive, Mr. Chambers, said that he saw improvement in the domestic market, especially toward the end of the quarter. Demand was also upbeat in Asian regions, particularly China. However, demand in Europe (which accounts for 20% of the company’s revenue) was falling and that things in the region would most likely get a lot worse before they gets better. But Cisco’s potential problems don’t really end here...
In the long run, the company faces a threat from the shift from hardware based networking capabilities to those that are software driven. This can be witnessed from VMware‘s (NYSE: VMW) recent acquisition of Nicira, the maker of software driven networking for a sum of $1.26 billion.
But I don’t think this should be much of a concern. While the exodus towards cloud computing might reduce demand from some of Cisco’s corporate customers, demand on the whole for Cisco’s networking technologies should look up.
The build out of cloud computing systems by businesses and cloud vendors would necessitate the use of equipment that allow data to whiz across networks. The demand for smartphones and streaming multimedia content will only drive cloud computing even further, which in turn should drive demand for Cisco’s famed switches and routers.
The Foolish bottom line
Cisco is literally sitting on a ton of cash. As of now, the company's cash and cash equivalents are valued at an astounding $48 billion. That’s almost half of the company’s market capitalization at current price levels.
Plus, I love how the company is rewarding its shareholders with the fruits of its ongoing turnaround. Cisco has promised to use almost half of its cash generated from operations to buy back the company’s common stock and pay out higher dividends.
With the emergence of one key growth driver called cloud computing, I feel confident that Cisco’s future is definitely going to be bright in the long run.
Moreover, Cisco still enjoys a dominant position in the digital networking space with a chest thumping 65.1% market share in the Ethernet switch (Layer 2/3) market. Right now, this translates into one heck of an influx of free cash flow for the company to enjoy for the foreseeable future.
So what do guys think of Cisco? Feel free to leave your comments in the space below.
kekidf has no positions in the stocks mentioned above. The Motley Fool owns shares of VMware. Motley Fool newsletter services recommend VMware. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.