What's Wrong With Cisco Systems This Time?

This is the song that never ends. Cisco Systems (NASDAQ: CSCO  ) is once again one of the absolute worst performers among the 30 Dow Jones (DJINDICES: ^DJI  ) stocks, dropping as much as 2.9% overnight. Yesterday, Cisco shares fell more than 2% on one analyst's sell rating. Today, Cisco is bringing the pain all on its own.

This terrible four-week span started with a sharp crack when Cisco reported a mixed first quarter but guided to weakness in the next reporting period. Going full circle, today's swan dive comes from another helping of soft management projections.

Cisco CFO Frank Calderoni, reducing his long-term growth goals by this much. Image source: Calderoni's official bio.

This time, we're not talking about a slow quarter or two, which is what the November plunge was all about. Cisco CFO Frank Calderoni took the stage at the company's annual analyst conference today and reduced his long-term revenue targets.

The company has been aiming for annual long-term sales growth between 5% and 7% for the last few years. Citing macroeconomic pressures in emerging markets, Calderoni slashed that range to a wider 3%-6%. The midpoint of the old target range becomes the high end of the new one. On a five-year scale, the guidance midpoint shrunk from 34% total growth to just 25%.

Calderoni also talked about conservative customer budgets and lengthy review processes when telecom clients qualify networking equipment for their large-scale upgrades.

Patience is a virtue, right?
Speaking at the same analyst event, CEO John Chambers dug deeper into the qualification process. On unidentified telecom took two years to evaluate various equipment alternatives and then committed to buy Cisco. So it's a long process, not a get-rich-quick scheme.

Chambers explained that Cisco faces a "rainbow" of rivals, including Chinese networking specialist Huawei, French-American rival Alcatel-Lucent (NYSE: ALU  ) , and all-American competitor Juniper Networks (NYSE: JNPR  ) . All of these offer "white-box" alternatives to some of Cisco's products, but Chambers argued that none of them can sell a complete end-to-end package.

In his view, that's important when you're designing a large and expensive network that should last until the next generational upgrade cycle. So the evaluation process for these builds may be slow, but Cisco should come out on top by default.

"Are service providers going to trust the future of their network to Juniper, to Alcatal, to Huawei?" Chambers said. "That's a battle we should win every time."

Well, that's not exactly how things are working out at the moment. Both Huawei and Alcatel have snagged a few high-value carrier contracts from under Cisco's nose recently, though I've heard less buzz around Juniper. Shares of Alcatel and Huawei surged in 2013 while Juniper and Cisco struggled.

All things considered, Cisco shares have plunged 14.6% over the last month while the Dow only lost 0.5%.

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  • Report this Comment On December 12, 2013, at 4:23 PM, BradReeseCom wrote:

    Hi Anders,

    Why Cisco's Board of Directors should be replaced.

    In my opinion, the only way shareholders will achieve a turnaround at Cisco is by forcing the retirement of Cisco Chairman and CEO John Chambers through the replacement of Chambers' handpicked Board of Directors in a shake-up:

    Don't forget that The Wall Street Journal has ranked Cisco as one of America's Most Dysfunctional Boards.

    Finally, imagine the letter Cisco shareholders would get from Cisco's potty-mouthed lead director Carol Bartz should they ask Cisco's Board of Directors be held both responsible as well as accountable for Cisco's poor performance by submitting their resignations.

    http://www.bradreese.com/blog/12-8-2013.htm

    Sincerely,

    Brad Reese

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