Cisco Systems (Nasdaq: CSCO ) released earnings last night, and a disappointed market took the stock out back for a sound beating. I'd just like to know what inspired this highly illogical reaction.
From any reasonable perspective, this was an excellent quarter. Sales and earnings both came in at the very top end of management guidance, and 36% earnings growth per share over last year is way beyond the stated goal of 10%-15% annual growth on that metric.
Whatever the market's reaction, the numbers look fine. Even better, CEO John Chambers can present solid reasons why the gravy train should continue rolling, along with a sober view of the challenges ahead. That's refreshing in this day and age.
Chambers says that the growth you see today is based on decisions made "three, five, and seven years ago." The network architecture envisioned a decade ago, where routers and switches contribute to the actual data processing instead of blindly passing along packets of traffic, looks like the right choice today for supporting "Web 2.0" applications like service-oriented architectures, unified communications, and online video.
Simply put, Cisco equipment can lift some of the processing weight off the network servers, which makes it possible to build more efficient services that are easier to support and less expensive. The value proposition there is easy to see, and it only increases as a bandwidth-hungry world latches on to ever more of today's traffic-intensive Internet services.
Of course, Cisco isn't the only choice for data-hungry businesses. Routers from tiny Israeli upstart Radware (Nasdaq: RDWR ) can direct traffic on a global scale with efficient delivery in mind, and I'm sure Nortel (NYSE: NT ) , Alcatel-Lucent (NYSE: ALA ) , and Juniper Networks (Nasdaq: JNPR ) have tricks up their sleeves, too. And don't forget the option to offload your own network with the help of outside service providers like Akamai (Nasdaq: AKAM ) .
But Cisco stands tall in a sea of lesser competitors. The market leader has an unmatched installed base and a human network of customer relationships that make it difficult for others to intrude on its markets. The rich get richer, and Cisco reached that tipping point many years ago.