Cisco's third quarter: Time for a candid chat about execution

Cisco's third quarter: Time for a candid chat about execution

Summary: The new, more focused Cisco Systems makes its earnings debut on Wednesday as it takes a baby step to regaining credibility with investors.


The new, more focused Cisco Systems makes its earnings debut on Wednesday as it takes a baby step to regaining credibility with investors.

Cisco's quarter was quite eventful. Following last quarter's miss, Cisco CEO John Chambers delivered a mea culpa, moved to streamline the company and killed off the Flip consumer camera. Much of the earnings conference call is likely to revolve around

Wall Street expects Cisco to report third quarter earnings of 37 cents a share on revenue of $10.86 billion.

So how has Cisco changed? The biggest news out of Cisco Tuesday was the acquisition it didn't make. Microsoft acquired Skype, which theoretically would have worked well in Cisco's business.

Instead of acquiring Skype, Cisco's big win was hiring David Yen to lead its server access and virtualization technology group. Yen was hired away from Juniper. In other words, Cisco isn't looking for a big bang, but working in the trenches to protect its core business. For Cisco, it's a bit of a change.

The good news for Cisco is that Wall Street isn't expecting much. Cisco is a work in progress that will have to show a few quarters of success. HP is clearly gunning for Cisco's core business. Analysts are skeptical about Cisco and even talking a breakup. A sampling of comments:

Morgan Stanley analyst Ehud Gelblum said:

As we’ve written several times, we continue to believe Cisco could be better off splitting itself into two or more pieces, each with different targets for growth and margin. While Cisco took strides resolving the internal issues facing the company in yesterday’s announcement, we continue to believe Cisco's primary troubles are more structural in nature and are best addressed through a break-up of the company.

Barclays analyst Jeffrey Kvaal said:

We anticipate clarity into plans to improve execution, including updated growth targets and opex plans. We believe retrenching to 5 core markets and streamlining of geographies/councils should allow tighter focus.

Stifel Nicolaus analyst Sanjiv Wadhwani said:

We expect this call to focus on a candid discussion about Cisco’s strategy going forward, what the company is doing right and what it needs to better in terms of execution. The company is already embarking on improving its operating model with the recently announced organizational changes, which we believe will eventually lead to headcount reductions. We expect to hear more about the efforts of COO Gary Moore on the earnings call. We also expect Cisco to revise guidance downward for the July quarter given the pressure it is facing in terms of pricing/margins, pressures on public sector spending and to account for various low-growth segments.

In other word, expectations for Cisco are low.


Topic: Cisco

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  • You really need to explain what Cisco "missed" in Q2

    Saying "Cisco missed" without explaining what areas Cisco missed analysts estimates is just bad journalism (Who, What, Where, When, Why, and How).

    In Q2, Cisco's revenues were $10.4 billion, compared to estimates of $10.2 billion.

    In Q2, Cisco's earnings per share were 37 cents per share, compared to estimates of 35 cents per share.

    Hmmm, where was the miss? Oh, here it is:

    In Q2, Cisco's gross margins were 62.4%, compared to estimates of 63.3%.

    To be journalistically correct, you should either have specified Cisco missed gross margin estimates in Q2, or defined Q2 as a "partial miss" or that Cisco missed some analysts estimates.

    Trust me, the analysts are going to divine some kind of miss for Cisco. After beating revenue and EPS estimates in Q1, analysts declared Cisco "missed" future (Q2) guidance. How does lowering future guidance constitute a miss? That was the analysts "missing", not Cisco.

    The truth is, the financial media likes pure plays. Pure plays are easy to estimate, and make the analysts look smart. Broad-based companies (i.e., HP, IBM) are harder to estimate (GE must be a veritable nightmare for analysts). And a company transitioning from a pure-play network vendor to a broad-based IT vendor has to be a nightmare for the analysts. Margins will come down, but to what? Growth will be smoother, but lower, but what will growth be? These company transitions expose the limits of the analyst. So the analyst runs to Juniper or Riverbed where the narrowness of the product range makes analysis easy.

    Steven Milunovich was seen as a genius following the pure-plays during the dot-com boom. But the Loon couldn't find his wallet in his back pocket with both hands once things got difficult. He ran to "Clean Tech", a collection of very narrow pure plays.
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  • RE: Cisco's third quarter: Time for a candid chat about execution

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