Good News Watch: Cisco Systems (CSCO) Reports Earnings (And They Weren’t That Bad)

Networking giant Cisco Systems, Inc (NASDAQ: CSCO) has not exactly been a great performer for any investor who got in the stock near the height of the dot.com bubble, but shares have put in a good performance for investors who have got in more recently as the company sits at the core of the cloud computing and next generation networking landscape – reasons we have recently added shares to our SmallCap Network Elite Opportunity (SCN EO). However, Cisco Systems' shares are also down more than 8% in premarket trading after having reported 4th quarter and full year earnings when the market closed yesterday, but those earnings were not all bad as investors need to consider the facts and the whole picture:

Wall Street's Expectations Were Met. Cisco Systems largely met Wall Street expectations when it reported a 6% revenue increase to $12.4 billion along with 52 cents a share on net income of $2.8 billion, up from 47 cents a share and net income of $2.5 billion for the same period last year thanks to a continued focus on hot Internet trends like video, wireless and big data. For the first quarter, Cisco Systems expects revenue between $12.26 billion and $12.5 billion along with earnings between 50 cents and 51 cents a share – basically what Wall Street is expecting. The company also reported it has $50.6 billion in cash, up more than $3 billion from the previous quarter. The Economy is "Challenging and Inconsistent." In the earnings call with analysts, CEO John Chambers repeatedly used the words "challenging" or "inconsistent" to describe the current global economy. That's hardly an excuse because frankly, the global economy continues to remain "challenging" or "inconsistent" for just about everyone. Chambers was quick to point out that the company still "delivered the strong performance" despite these headwinds due to Cisco's "increasing strategic position in the market and our ability to manage our overall business as a portfolio across technologies, customer segments, and geographic regions." Some US Momentum and Weakness in Asia. CEO Chambers pointed out in the earnings call:

"While we saw continued momentum in year-over-year orders in the U.S. enterprise up 9% U.S. commercial up 12% and an upturn in U.S. public sector which grew at 4% and APJC our Asia-Pacific, Japan, China operations we saw the same weakness many of our peers experienced with orders down 3%."

And he also reiterated:

"Last quarter I described a continued slow recovery and I haven't seen anything to suggest that this dynamic will change in the short term but this recovery is more mixed and inconsistent than the others I've seen."

Layoffs to Cut Down on the Bureaucracy. Cisco Systems will cut about 4,000 jobs or 5% of its workforce (albeit perhaps a 3rd of the people in these positions will be shifted around the organization) because in the words of the CEO: "We just have too much in the middle of the organization" and "What I am really after there is speed of decisions but more importantly speed of implementation." Certainly, one has to feel bad for anyone who looses their job as part of this workforce reduction, but it should make the company leaner and more profitable in the future if its carried out right. Share Performance. Cisco Systems is up 35.6% since the start of the year, up 50.4% over the past year and up 8.8% over the past five years for a rather choppy five year performance chart that is below the performance of major indices:

However, the following longer term chart along with the more recent technical charts should be of more interest to investors:

Once the dust settles from the earnings report and trading stops at the end of today, it will be interesting to see whether or not Cisco Systems actually closes down 8% as the earnings report looks pretty solid – despite the candid comments from the CEO about the actual state of the global economy which no one else (especially in the media) wants to really hammer home about.

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