It used to be that Cisco Systems
Not anymore. Cisco's third-quarter earnings, reported Wednesday night, came in above Street estimates with $0.42 of non-GAAP earnings per share on $10.9 billion in revenue. But the fourth-quarter outlook was downright dismal, and the long-term view even worse. CEO John Chambers is getting his hands very dirty these days:
- As announced last week, Cisco is streamlining its operations and cutting some dead weight that doesn't belong with the core networking business.
- Job cuts and efficiency programs should shave $1 billion of annual costs off the income statement. The exact nature of the headcount reductions will be shared by the end of the summer, and includes an early-retirement option for Cisco veterans who don't mind stepping out.
- The most telling concession is this: the long-held goal of 12% to 17% annual sales growth is being thrown out the window in coming quarters; Cisco sees no more than 2% higher sales coming up.
"Throughout our history, Cisco has adopted and evolved to meet both challenges and opportunities," said Chambers. "This time is no different."
Except, it really is different this time.
So what's changed?
Throughout Cisco's history, the company has been able to lean on a unique social network. IBM
This time, there are alternatives. Cisco basically told HP and Big Blue to get lost when it launched a server line, thus becoming a direct competitor more than a partner. IBM cut the cord and started reselling more Juniper Networks
Now HP and Juniper are stealing business from Cisco, and nobody expects the stumbling giant to fight back anymore. So when Cisco's guidance disappoints, that's no longer a warning signal for the whole industry. Shares of Cisco rivals, from Juniper to Alcatel-Lucent
I used to think of Chambers as a demigod of the IT business, in better position to divine and exploit market trends before they happen than anybody else, except perhaps tendril-intensive giants IBM or Microsoft
Cisco is too big to die here, but its glory days are over. Management has given up on its big growth dreams, which used to be actual plans. So enjoy the dividends, dear Cisco investor. Cisco shares are cheap at less than 13 times trailing earnings, but deservedly so and I don't see any catalysts that will turn the tide anytime soon. It's a trust issue with no quick fix.
What do I do now?
A lot of investors do believe in Cisco. It's a four-star CAPS stock (out of 5) with a 95% approval rating and a bullish real-money position for two Foolish newsletters. If I'm wrong and they're right, then Cisco is on its way to becoming a true end-to-end solutions provider for the data center, which doesn't sound bad in theory. You can bet on that at these low share prices if you want, but I'm not going there. Even John Chambers thinks that transformation will take years, or else he'd stick to that old mid-teens growth projection.
The proof is in the pudding, and Cisco makes plenty of news. The best way to stay on top of its progress -- or lack thereof -- is to add Cisco to your Foolish watchlist. That way, you'll be in the know as soon as Cisco's situation changes. Click here to get started.