Cisco's Chamber's Predicts Rough Patch Ahead
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Cisco (NASDAQ: CSCO), designer and seller of networking and communication devices, has a market cap of $89.9 billion with a current stock price of around $17.
In the fiscal year ending in July of 2011, Cisco's net income and earnings per share were down by 19.5% and 13.6% respectively from 2010. When the 2011, fiscal year earnings were reported Cisco's executives dedicated themselves to improving company margins and taking on competitors like Hewlett-Packard (NYSE: HPQ) and Juniper Networks (NYSE: JNPR).
Cisco's plan for the future
Cisco's data center business is the catalyst that the company plans to use to increase earnings. Cisco's data centers enable its customers to securely provide an optimal cloud application experience for its employees. As a result of Cisco's Global Cloud Networking Survey, the company "predicts that more than 50 percent of computing workloads in data centers will be cloud-based by 2014, and that global cloud traffic will grow over 12 times by 2015, to 1.6 zettabytes per year - the equivalent of over four days of business-class video for every person on Earth." These are enormous growth figures, and they are the reason that Cisco is making major strides to maximize its data center businesses. In the third quarter conference call, Cisco's CEO John Chambers said Data center revenue continued to grow very rapidly at 67%. Data centers or servers, have been Cisco's "fastest growing business, and are likely to drive nearly 15 percent of the company's expected growth this year." Sales of data center products rose by 44 percent last year.
Cisco has a data center vision that is called "unified computing." In the unified computing model, complex storage and processing setups can be separated from their hardware and virtually rearranged with the push of a button. "Some Cisco-watchers monitoring the networking giant's bold rollout say there may be a fine line between that "unified" scheme and a bid for populating the data center exclusively with Cisco's own networking and processing hardware." In the first step of its unified computing plan, Cisco will release a new set of products, code-named "California," that tie together the networking, storage, processing and virtualization of a data center. The California product will include the first server Cisco has ever offered, powered by an Intel (NASDAQ: INTC) Nehalem processor, and VMware (VMW) virtualization software. Cisco's partnerships are notable, because the Intel processor will improve the California products' power consumption characteristics, and "VMware is by far the most successful virtualization software provider."
The California system won't be sold piecemeal, which means customers will have to use Cisco's servers, "rather than those offered by competitors like Dell (DELL), Hewlett-Packard, or IBM (NYSE: IBM)." The unified computing strategy will give Cisco a tremendous competitive advantage over other companies like IBM, which offers a Smart Business Desktop using the IBM cloud. The all in one concept will help solidify Cisco's position as the industry leader in providing cloud computing services as "over 70% of the leading cloud providers are using Cisco's CloudVerse on their journey to the cloud."
Unfortunately for Cisco, the increase in revenues from its data centers has not been able to offset the loss in revenues from its core switching business and public sector business. Revenues in the switching business were down 9 percent over the third quarter last year, while the public sector business, with both federal and state governments struggling to deal with budget shortfalls, dropped 8 percent.
Positives for Cisco
Chambers has said that "over 70% of the leading cloud providers are using Cisco's CloudVerse on their journey to the cloud, and our traction with our massively scalable data centers and Web 2.0 customers continue to be very strong." Companies buying into the CloudVerse Systems include Fujitsu, LinkedIn (LNKD), Orange Business Services, Qualcomm (QCOM), Silicon Valley Bank, Telecom Italia, Telefonica S.A., Telstra, and Terremark.
In further news regarding Cisco's Cloud computing products, on June 27th Cisco announced its first Linksys Smart Wi-Fi Router and Universal Media Connector, both powered by the industry's next-generation wireless technology, 802.11ac. The new technology is designed to deliver wireless speeds approximately three times faster than the current wireless 802.11n standard.
Cisco's switches have "stymied competitors" such as Juniper Networks and Hewlett-Packard, and the company is gaining share in the lucrative core router market.
Negatives for Cisco
Chambers gave a reduced outlook regarding Cisco's fourth quarter earnings. He said that "customers are waiting longer to close deals and spending less money because of growing concerns about the economy, particularly in Europe and India." He also said that Cisco's "goal of 12 to 17 percent growth every year was "off the table." In addition the company warned of "job cuts and more reorganization inside the company."
Cisco's plans to move into the mobile device market seemed to have failed. Cisco recently announced that it would be "discontinuing its Cius tablet. The company cited the failure of the product in a ''market transition,'' which is a good way to describe the reality that people didn't buy it. Cisco's Cius tablet was not able to compete against the iPad and Android products, which have picked up most of the market. In addition, the Cius tablet would have been facing even more competition, as "new laptops, phones and tablets will be out running the Windows 8 operating system from Microsoft."
Conclusion
Cisco's revenues have been flat over the last four quarters, and in the last quarter's conference call it was announced that revenues would likely be lower in subsequent quarters. Since that May 9th announcement, the stock price has dropped by 11.4%. While Chambers is "confident that the company will bounce back, the next few months will continue to be rough ones." It seems to me that Cisco is in a downward trend, and that there is no way to predict when the trend will reverse itself. I believe that Cisco's CloudVerse initiative shows long-term promise, but I would not recommend investing in Cisco at this time, because, as Chambers said, the next few months could be "rough."
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