Cisco Sails Into the Wave of the Future

June 11, 2014 Leave a comment

Cisco Sails Into the Wave of the Future

DAN GALLAGHER

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June 3, 2014 1:04 p.m. ET

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Cisco Systems CSCO -0.42% has persuaded shareholders to stop jumping ship. Now it just has to keep them aboard for what could be a long and somewhat rough voyage.

A strong quarterly report on May 14, along with a positive reception to its Cisco Live conference the following week, has provided some spark to networking giant’s shares, which had been relatively flat for the prior 12 months. Cisco’s stock has risen about 7% over the past three weeks.

The upbeat mood comes after a long rough patch for the company. Last August, Cisco said it would cut about 4,000 jobs due to a “challenging and inconsistent” global economy. Three months later, it missed analysts’ revenue forecast for the first time in three years. The stock lost nearly one-quarter of its value within four months late in 2013.

Investors now are betting that Cisco can return to revenue growth after two quarters in a row of year-over-year falls. Expectations are relatively modest. Cisco is expected to close out its fiscal year ending in July with a 3.5% decline in revenue year over year. Analysts expect growth to return in fiscal 2015: about 4.4% for the full year, according to FactSet.

Hitting even that target isn’t guaranteed, though.

Cisco faces the challenge of new technologies such as software-defined networking, which is designed to reduce the need for additional networking hardware by making existing devices run more efficiently. Another challenge comes from firms such as Amazon.com, AMZN -0.53% Google GOOGL -1.74% andFacebook FB -0.33% that are building big data centers with so-called white-box equipment custom made by overseas vendors—who charge much less than Cisco.

Cisco is responding by incorporating software-defined networking into its latest products and by adjusting its business model. At a May 20 analyst meeting, Cisco laid out plans to start selling different suites of software and services on a subscription basis in order to simplify its offerings. Chief Executive John Chambersalso used his keynote at the conference to take aim at the “hidden costs” of using white-box equipment.

These are the right moves for Cisco to be making, but they will take time to bear fruit. Meanwhile, competitors such as Huawei Technologies are moving quickly to attack core markets like routing and switching, which still account for about 46% of Cisco’s total revenue. And Cisco’s overall gross margin of 60%-plus makes the company more vulnerable to price cutting by rivals who don’t have to hit that kind of number to appease investors.

Helping Cisco in this is a relatively low multiple of just 11.1 times forward earnings, as well as more than $50 billion of cash which could fund more acquisitions in growth areas such as cloud and security. The dividend yield of 3.4% also is higher than for most big rivals. Such enticements may help soothe investors as Cisco tries to turn the ship. They will need them. It’s rough out there.

 

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Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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