Is There Light at the End of Cisco Systems, Inc.'s Tunnel?
Feb 18th 2014 1:00PM
Updated Feb 18th 2014 1:02PM
Technology giant Cisco Systems is still mired in a period of declining revenue. And there are some serious issues dragging down the company, particularly in emerging markets.
Cisco's second-quarter results looked very much like its first-quarter results. Revenue declined across the board, including most of its key geographic regions. Making things worse is that management's outlook for the next quarter doesn't foretell any better results.
Cisco has a lot to offer, assuming it can execute in emerging markets, which is its major growth opportunity going forward. For now, however, the company's outlook remains cloudy.
A rundown of Cisco's results
Cisco reported an 8% drop in revenue in the second quarter. Its net income fell 54%, but much of that was due to a one-time charge of $655 million related to resolving an issue with memory components sold in years past. Stripping out this non-recurring event still paints a less than impressive picture. Cisco's adjusted earnings-per-share fell 8%, largely due to lower sales.
It turns out that Cisco's international operations in developed economies were its source of strength in the most recent quarter. Its Europe, Middle East, and Africa division saw product orders decline 2%, which was the best performance of any geographic unit. Among its customer mix, Cisco's commercial business led the way with a 1% product order increase.
One area of particular concern is Cisco's poor performance in Asia. Its Asia Pacific, Japan, and China division saw product orders decline 5% in the quarter. Cisco isn't about to walk away from Asia, however. It has stated its intention to be in Asia for the long-term, because emerging economies such as China hold massive potential.
IBM saw its fourth-quarter revenue decline 16% in its Asia-Pacific segment. More broadly, in its BRIC operations (which include Brazil, Russia, India, and China), IBM posted a 9% revenue decline. In fact, IBM Chief Executive Officer Virginia Rometty recently visited China to meet with government leaders in an attempt to improve the company's standing.
Cisco's outlook a cause for concern
Going forward, Cisco's difficulties are not expected to subside. Management expects sales to drop between 6% and 8% in the current quarter. This would represent the third quarter in a row of mid-single digit revenue decline, which would understandably cause investors to lose patience. This is particularly true because close competitor Juniper Networks is thriving.
Juniper's revenue grew 12% in the fourth quarter, which was its sixth consecutive quarter of year-over-year revenue growth. A major reason for Juniper's success is it's executing much better in Asia. Revenue in its Asia-Pacific region grew 18% in the fourth quarter. As a result, Cisco is in a bind to make sure it doesn't fall behind other networking companies in the rapidly growing emerging markets.
The Foolish bottom line
One positive is it increased its quarterly dividend by $0.02 per share, or 12% on a percentage basis. Despite Cisco's current struggles, it's been very successful in ratcheting up its cash returns to shareholders. After instituting its dividend in 2011, Cisco has more than tripled its payout. In addition, Cisco repurchased $4 billion of its own shares in the second quarter.
However, more pressing concerns exist in Cisco's inability to grow and maintain market share. Cash returns are nice, but Cisco's long-term growth questions need to be addressed. As is the case for many large technology companies, emerging markets present strong growth opportunities, and it's up to Cisco to make sure it doesn't miss out.
Cisco isn't growing, but this company is
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The article Is There Light at the End of Cisco Systems, Inc.'s Tunnel? originally appeared on Fool.com.Bob Ciura has no position in any stocks mentioned. The Motley Fool recommends Cisco Systems. The Motley Fool owns shares of International Business Machines. 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.
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