It's been a roller coaster ride for technology giant Cisco Systems (CSCO +3.74%) and its investors over the past few years. CEO John Chambers has been both criticized and praised in the financial media for his leadership abilities, depending on whether his company was able to meet quarterly earnings estimates. It seems that analysts either foretell of Cisco's doom or sing its praises on a quarterly basis.
This time, Cisco's quarterly earnings report, released on May 15, was very well received because the company topped expectations. This was a reversal from the previous quarter, in which Cisco didn't reach expectations and got crushed in after-hours trading.
While Cisco's shares have seen their ups and downs, the fundamental story of the underlying business hasn't really changed much over the past few years. Cisco remains a highly profitable company with a strong dividend yield and opportunities for future growth, but at the same time, it's struggling to execute in the emerging markets. That's what investors should keep in mind -- and brush aside the prevailing sense of fear or jubilance that always arises after the company releases earnings.
Cisco wins the expectations game this time around
After reporting earnings results three months ago, Cisco shares sold off. Analysts were quick to chip away at the company. The technology giant was supposedly too mature, too large, and had lost the innovative power necessary to restore growth going forward. There were bits of truth to the bearishness, as Cisco had under-performed significantly in recent quarters, especially in the emerging markets. To demonstrate, Cisco reported 8% lower revenue and an 8% drop in adjusted earnings per share in the second quarter.
Unfortunately, Cisco didn't really perform all that much better this time around. Cisco's third-quarter report revealed that revenue and earnings per share fell 5.5% and 8.7%, respectively, year over year. As you can see, this doesn't represent much of an improvement from the prior quarter's results, but you wouldn't know it by the market's reaction and ensuing conference call with analysts. Cisco shares jumped 6% after reporting on a day in which the Dow Jones Industrial Average fell nearly 170 points.
CEO Chambers struck a rare tone of confidence and swagger on the conference call, going as far as to say Cisco would "crush" rival VMware, (VMW +0.00%) due to a new networking product. Recently, VMware had teamed up with a small company it acquired in 2012 for $1.26 billion to make entry into a business called software-defined networking.
In the conference call, Chambers essentially dismissed this partnership, saying that Cisco has basically won back all the customers it previously lost. Going forward, he said, Cisco is making great strides in the software-defined market, and it will soon take a leadership position in the industry.
Turnaround intact, but still a ways to go
Cisco managed to beat earnings expectations, but mostly because it had a low bar to hurdle. It's been reporting declining sales and profits for a while now, and unfortunately that persisted in the last quarter. Chambers was extremely confident in his outlook, saying that his company would crush one of its fiercest competitors. Whether that happens remains to be seen. One thing is for sure: Cisco is still having structural problems, particularly in the emerging markets.
To that end, Cisco's orders in the emerging markets declined 7%. This includes the BRIC nations, which refers to Brazil, Russia, India, and China, and it's important for Cisco to reverse course there. The emerging markets represent a huge opportunity for technology companies like Cisco that are large enough to have a global scale. That's due to the potential for above-average economic growth in underdeveloped nations.
Cisco's shares jumped after reporting earnings, although the underlying results weren't substantially better than previous quarters. That being said, Cisco is still a highly profitable company with a strong balance sheet and a high dividend. In that respect, Cisco has a lot to offer. But until its fundamentals improve, it seems premature to say that Cisco has won the battle.
