- Cisco has beaten its performance expectations for 10 consecutive quarters.
- Earnings came in at $.52 a share.
- Revenue came in at $12.4 billion.
- Net income came in at $2.8 billion, which is a 12% increase year-over-year.
- Revenue generally was up 6% year-over-year.
The company is in the perfect market for remaining in "growth mode" for some time. It works in the cloud, the mobile industry, security and even enables companies to bring their own storage devices. This is a growing industry and will continue into the future. Cisco has not been trapped by the "PC market" like other major global companies such as Microsoft (MSFT), so expectations continue to be high for the company.
Even though the company may look like it has a bright future, Mr. Chambers placed a "dark cloud" over the growth mode. He offered a dim forecast for Cisco and for the markets in general. On top of this, he also announced that they would be letting go 4,000 people. The job cuts were defended by stating that the company had to figure out where growth opportunities were going to take place and where workers were needed. The company needs to make sure that the right sets of skills are in the right place for work and this is why layoffs are needed.
So what will happen to the stock with the announcement of so many layoffs?
After the initial reaction that we saw on the stock, I believe that "the layoffs" could be seen as a strong long-term buy signal by shareholders. For investors that look at the NASDAQ as a whole, or the ETF (QQQ), it won't have much of an impact.
Honestly, this looks more and more like a strategic move by Mr. Chambers to lift the price of the stock. A stock usually drops around a financial report because a company's sales and/or profit growth are expected to fall short of analysts' expectations. Investors usually like the combination of job cuts, lower operating costs and boosted profit margins. Is there real pessimism at Cisco or was there a lot of profit taking?
Investors may recognize this same pattern from a year ago when the company announced the elimination of 1,300 employees was going to take place. The stock was down over 10% since the beginning of the year, but after the announcement of the layoffs, the stock rose almost 40% by year's end.
Even though present numbers were acceptable, Mr. Chambers took the position that the slow and steady improvement was not at the pace they wanted and predicted the present quarter could see revenue improvement of only 3%. So here we have a company that's doing well. This can be seen in the "breakout revenue" from new products that have been so readily accepted by its clients.
The stock gapped up in mid-May and continued climb. Did this cause Mr. Chambers to strategically put the brakes on such extreme growth and let it rest before it moves up again? The company's stock has experienced almost a 24% growth in the last three months.
The company is by no means hurting and I personally would not advise an investor to sell the stock. This drop looks like a buying opportunity, but how far down will it go? There is strong support just under $22 so I would not be surprised if that's where it ended up. From there it may move in a modest trading channel until we get into next earnings season.
This is just my observations based on looking at the past track record of the company. I realize that revenue growth for the company was a modest 5.5% from 2012. The company also had a net income growth of 24% and that's good.
Even though the pessimistic nature of Mr. Chamber's speech downplayed growth, I am sure in the midst of the announcement of 4,000 job cuts profit estimates should go up. I cannot make the prediction that the stock is going to go up, but if the company continues to perform like it has then I believe it may be a good time to buy the stock. The probability of seeing the growth pattern take place again as it did in 2012 and 2011 is very good.