Analyzing Networking Companies' Mostly Lackluster Earnings
Nihar is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Networking has been having a tough time. 2012 was just an awful year, and 2013 was off to a slow start. I took my time writing an earnings article, because I wanted to wait for Cisco (NASDAQ: CSCO) to join the bunch and give it some thought. As far as initiatives go, Alcatel-Lucent (NYSE: ALU) needs to do more if it plans on returning to profitability. Juniper Networks (NYSE: JNPR) needs to do more about growth, but it is in a steady position and does not need severe expense-cutting.
Less coddling, more cutting
I was disappointed by Alcatel-Lucent's recent earnings, because the expense reductions were in the millions. The company wants to cut 1.25 billion euro by the end of 2013, and if this quarter just had about 100 million euro in cuts. I suppose it is almost one-twelfth of the way there, but it is prudent to take a "wallet half empty" approach.
The company cannot hope to reach its goal if it uses kid gloves. More aggressive cuts are needed, and hopefully, Q2 will show far larger cuts. The reason for this is that the company should be early in its expense-cutting. It cannot all be hard cuts that need constant thought. The company would not be in this situation if it was not bloated with things that could be easily lopped off.
Before declaring absolute Armageddon, the first quarter of 2013 was the last quarter for CEO Ben Verwaayen. At the start of the second quarter, Michel Combes took over. It could be that the first quarter was not as aggressive because the CEO was just focused on wrapping up anything already started instead of taking on new things. That allows Combes to start with as clean a slate as possible. Apparently, Combes does have a history of effective belt-tightening. There is no time for a learning curve, since the first quarter showed little progress.
Make more money, simple
Juniper's earnings were met with some sadness as revenue missed by $10 million. It might just be that financial news sites were looking for something to report that explained Juniper's drop. There are very real concerns about revenue growth at Juniper, and it could be that revenue being seen as flat was actually the cause of the drop.
I went through Juniper's products online trying to find out if there was anything that would really set the company on the path to continual and regular revenue growth. A lot of the products I looked at formed alternative to other Juniper products. Price and volume might make revenue rise a little, but overall, it is diversity within a similar line of products. It might win over a few customers, but it will not increase what your current customers buy. Juniper might be at the point that it needs other offerings that fit around its current products as a way to increase revenue. Cisco had to do the same thing once it hit a certain point.
Alcatel-Lucent has been focusing less on growth and more on improving its product mix to derive more revenue from higher margin products. This makes sense, since the company has to keep a lid on R&D. The last earnings call made me slightly comfortable knowing that they increased R&D expense a little for some products in order to keep innovating. It needs to innovate, but also needs to take a tightfisted approach to R&D expense. That is a tough balance and will probably test the new CEO. Focusing on higher margin products will allow the company to try and boost profits without having to spend a ton of money developing and marketing something new.
Cisco finally arrives
Cisco finally had an earnings report that helped the stock move past its $20-$21 range. The movement was the day after earnings, followed by some cooling off, and then back into the $24+ area it hit the first day following earnings. Cisco beat on the top line, which I think is the main reason the stock finally reacted. Cisco has done well on the bottom line for quite some time, but people have wanted to see growth above and beyond expectations, which seems a bit ridiculous. Despite the lack of share price movement, Cisco's revenue has been on an uptrend. The growth story at Cisco is over, and it seems that people are not yet ready to accept this, but the company is still growing.
I am still looking for something new that Cisco is trying to get excited about. For now, I just like the company. After the last earnings call, I closed my Jan 2014 $30 calls for a nice profit. Cisco has been a stock that goes right back to its $20-$21 range when it gets some bad news or the market has a couple of bad days. I was always a bit uneasy that the calls were at $30 for 2014. I would have preferred $30 for 2015, but the price was not there. I will be keeping an eye out for a new position, but have nothing planned.
I still have nothing on Juniper's potential future. SDN is nice, but it is at least a year out and increasingly crowded. The PTX line that they just released is interesting, but it not likely to really make the difference in the company's results. I like Alcatel-Lucent, but it is getting harder and harder to see the light. I like it for its opportunity to turn itself around, but the window is closing. The company has new leadership and we have zero information on how its new CEO will progress in this new role.
For now, I maintain my bullish stance on Alcatel-Lucent. Cisco is a strong company, and I think it will continue posting solid earnings and see its stock move higher. I am looking for a re-entry point.
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Nihar Patel has the following options: Long Jan 2014 $2.5 Calls on Alcatel-Lucent (ADR) and Long Jan 2015 $3 Calls on Alcatel-Lucent (ADR). The Motley Fool recommends Cisco Systems. 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!