Cisco Systems 2Q Earnings Preview: Move To Software-Defined Network Gains Takes Time
By David Zielenziger | February 12, 2013 7:38 AM EST
When Cisco Systems Inc. (NASDAQ:CSCO), the No. 1 provider of Internet products, reports second-quarter results on Wednesday, investors expect marginally higher earnings on marginally higher revenue but nothing like what’s promised for the company’s future.
Two months ago, veteran CEO John T. Chambers outlined a plan to shift from hardware to software, targeting the cloud and the expanding world of “big data” that will require software-defined networks (SDNs) with a long-term profit goal ranging between 7 percent and 9 percent.
Over an 18-month transition, the San Jose, Calif., company wants to boost its earnings from software and services above 50 percent, compared with roughly 22 percent now, Chambers said. Cisco still gets most revenue from selling switches and routers for large computer networks.
Cisco has already moved in its new direction. Last month, it announced plans to sell its Linksys unit, which develops Wi-Fi routers and other networking products for consumers, to private Belkin International, for an undisclosed sum. Cisco acquired Linksys, of Irvine, Calif., for $500 million in 2003.
Cisco said it plans to work with Belkin on software after the divestiture.
Last month, Cisco tapped its $45 billion cash pile to acquire Intucell, a private Israeli developer of SDNs for the mobile phone sector. The price was $475 million plus retention-based incentives for senior executives who’ll be integrated into Cisco’s Service Provider Mobility Group. The acquisition is expected to close by midyear.
Analysts expect Cisco to report second-quarter earnings of $2.55 billion, or 48 cents a share, a penny ahead of prior-year earnings. Revenue is expected to rise only about 5 percent to $12.06 billion.
Twenty-nine of the 38 analysts who cover the stock have a "buy" rating on the shares.
While forecasting a notable gain over the major slowdowns and losses reported during 2013, they say Cisco is running better now but the enterprise market and government agencies aren’t ordering new products as robustly as expected.
Amitabh Passi, who covers Cisco for UBS, said public sector orders, which can account for as much as 20 percent of demand, remain soft. His survey of chief information officers (CIOs) of major corporate customers showed they expected growth to be lower than previously expected over the next 12 months, or 4.4 percent, compared with as much as 7.8 percent they'd earlier predicted.
In Cisco’s favor: The CIOs plan to concentrate on software and security services, with more than 40 percent showing a preference for Cisco products, compared with those of rivals such as Dell Inc. (NASDAQ:DELL), Juniper Networks Inc. (NASDAQ:JNPR) and Aruba Networks Inc. (NASDAQ:ARUN).
That gives Cisco “the fire power” to execute its plans, Passi said, with long-term gains in earnings. The analyst has a “buy” rating on the shares with a 12-month target of $23.50.
At Sterne Agee, analyst Shaw Wu said he presumes the earnings will be “modestly better” than anticipated because some of Cisco’s rivals including Juniper Networks and F5 Networks Inc. (NASDAQ:FFIV) have reported better-than-expected results. One reason could be that small- and medium-sized businesses appear to be ordering more as opposed to enterprises.
Wu estimated about 50 percent of Cisco sales comes from enterprises, with only about 20 percent from the smaller-sized customers.
The analyst also has a “buy” rating on Cisco, with a 12-month target of $23.
With dividends included, the return on Cisco shares for the past 12 months has been 9 percent.
They were are at $21.16, down a penny, in late Monday trading.
To contact the editor, e-mail:
Most Popular Slideshows
- Flight MH17 Attack: Russians Claim 'Putin A Terrorist,' Memorial at Dutch Embassy Overflows [PHOTOS]
- Typhoon Rammasun Claims 18 Lives in China, Incurs $4.32B Losses (PHOTOS)
- Ellen DeGeneres Caught Cheating with Mutual Friend Before Portia de Rossi’s Rehab – Reports [PHOTOS]
- Typhoon Matmo Leaves 32k Customers w/o Electricity in Taiwan, Weakens After Landing in China
Join the Conversation
- Kanye West Allegedly Compares Himelf With Reggie Bush as a Lover, Is Insecure and Jealous of Kim Kardashian's Ex - Reports
- Pope Francis Meets Sudanese Woman Who Was Spared Death for Apostasy (PHOTOS)
- Apple Reports Weak iPad Performance, Found to Top Web Traffic with 78 Per Cent Share
- Halo 5: Guardians and Halo: Nightfall Get New Info and a First Look at the SDCC 2014
- Sci-fi 'Lucy' Uses More Than The Usual 10% of The Brain [Video]
- Samsung Galaxy Note 4 Apps Leak Online, Five Fresh Features to Expect from the Android Smartphone
- Moto 360 Price Speculations, Key Features, Strategic Release Date, Design: A Watch That is More Than Just Time
- Windows Phone 8.1 Update Rollout: 20 Nokia Lumia Phones Eligible and 13 New Features to be Added
- HTC Google Nexus 8 Release Date Imminent with New Nexus 7 Deals, Two New Tablets Soon
- Three New Moto G Successors Spotted in FCC Document Dubbed Moto G2, Moto M and More --Reports
- iPad Air 2 Release Date Will Skip IGZO Panel; To Rollout with Super-Slim iPad Mini Air
- Upcoming iPad Mini 3 Could be 30% Thinner and Likely be Called iPad Mini Air; Apple Q3 Results Show 9% Decrease in iPad Sales