Why This Tech Giant Boomed--And If They Can Do It Again

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In early November, Cisco (NASDAQ: CSCO) reported what the company has called “record results,” including double digit growth of 18% in both net income and earnings per share (the former rose to $2.1 billion, the latter $0.39.) Who do shareholders have to thank? Most believe the man behind the bulk of the success is John Chambers, chairman and CEO.

"We delivered record results this quarter -- with revenue growth of 6 percent and strong earnings per share growth -- demonstrating our vision and strategy are working," said Chambers. "Our innovation engine, operational discipline and on-going evolution are enabling us to differentiate in the market."

Let’s look at some of the numbers that have investors so excited:

<table> <tbody> <tr> <td> <p> </p> </td> <td> <p> </p> </td> <td colspan="2"> <p><strong>Q1 2013</strong></p> </td> <td> <p> </p> </td> <td colspan="2"> <p><strong>Q1 2012</strong></p> </td> <td> <p> </p> </td> <td> <p><strong>Vs. Q1 2012</strong></p> </td> <td> <p> </p> </td> </tr> <tr> <td> <p>Net Sales</p> </td> <td> <p> </p> </td> <td> <p>$</p> </td> <td> <p>11.9 billion</p> </td> <td> <p> </p> </td> <td> <p>$</p> </td> <td> <p>11.3 billion</p> </td> <td> <p> </p> </td> <td> <p>5.5</p> </td> <td> <p>%</p> </td> </tr> <tr> <td> <p>Net Income</p> </td> <td> <p> </p> </td> <td> <p>$</p> </td> <td> <p>2.1 billion</p> </td> <td> <p> </p> </td> <td> <p>$</p> </td> <td> <p>1.8 billion</p> </td> <td> <p> </p> </td> <td> <p>17.7</p> </td> <td> <p>%</p> </td> </tr> <tr> <td> <p>Earnings per Share</p> </td> <td> <p> </p> </td> <td> <p>$</p> </td> <td> <p>0.39</p> </td> <td> <p> </p> </td> <td> <p>$</p> </td> <td> <p>0.33</p> </td> <td> <p> </p> </td> <td> <p>18.2</p> </td> <td> <p>%</p> </td> </tr> </tbody> </table>

(Source: Cisco.com )

So where did things go right for Cisco? Well, for starters, their video business grew, thanks (in part) to the $5 billion acquisition of the NDS Group completed this past July. Additionally, their wireless and data center sales also saw significant growth, partially due to the increase in demand for mobile devices and cloud computing technology, and Cisco was able to consolidate a significant amount of its manufacturing and networking systems, all of which lead to gross margins driving up 0.3% from a year ago.

However, it wasn’t all positive at Cisco, despite what the numbers tell. Cisco faced many problems over the quarter, including a 6% decrease in government buying, one of the biggest portions of Cisco’s sales. In addition, global big business purchases slipped 1 percent, while sales in the European-dominated market fell 10 percent. Cisco’s arguably most important element, switching, fell 2 percent.

Still the end result was extremely positive, shooting up shares by more than 7 percent in after-hours trading. But, what does it all mean? Can they keep it up?

Well, there’s little-to-no reason to believe that they can indefinitely keep up double-digit increases in net income: no company can. So, let’s look more closely at some of the signs that may tell of bad news for the future of Cisco:

Some of the big-ticket items that provided some of the boost for Cisco were one-time deals: a partnership with NBC Olympics led to a boost in income, but is obviously over. Cisco’s consolidation was impressive, but only so much consolidation can be done.

In addition, some of Cisco’s biggest assets, including switching, government buying, and global revenue all saw significant decreases.

However, in a transition to what Edward Jones senior technology analyst William Kreher calls “a different company,” Cisco saw booming revenues in growing fields like cloud computing and mobile device software and hardware.

Add it all up, and what does it mean? Well, there are positives and there are negatives. Cisco seemingly has plans to skew the balance of their assets so as to place more weight on the growing areas and take weight away from the shrinking areas. Should they be able to do so successfully, which many analysts (me included) think they can, all should remain well. Granted, double digit growth may not be in Cisco’s future; however, they seem to remain a safe bet for profitability.

How do Cisco's competitors stack up? The main competitors to Cisco are considered to be Alcatel-Lucent (NYSE: ALU), HP (NYSE: HPQ), and Juniper Networks (NYSE: JNPR). 

As I recently stated, HP is on track to increase its mobile computing and cloud technology over the next four years. However, as of right now, in their state between introducing cloud computing and becoming competitive cloud technology providers, they are not a massive threat to Cisco's business. 

Alcatel-Lucent is supposedly "making a comeback," and has recently agreed to a big deal with Telefonica over IP services. However, they have a smaller market share and a much smaller market cap than Cisco and threats to Cisco, if they do become serious, may not be for a while.

Finally, Juniper Networks, the company that was once considered to be the main rival of Cisco, has failed to maintain any sort of substantial growth. 

Cisco has been acquiring smaller companies in order to keep them out of the hands of companies like Alcatel-Lucent and Juniper. Juniper has remained surprisingly quiet throughout the process.

For the current quarter, Cisco predicts revenue of $11.9 to $12.2 billion. Analysts estimates about $12 billion. Do you think that they can keep up their fortune? Several signs point either way, yet my faith stays strong that they can find the perfect balance and continue to increase revenues.


Michael Nolan has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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