Cisco: A Slow-Moving Company In The Middle Of A Massive Churn.

Jun.18.14 | About: Cisco Systems, (CSCO)

Summary

The news around exit of CEO John Chambers is surging and it will be in favor of Cisco to get a fresh and enthusiastic leadership.

The opportunities and challenges presented by SDN will be instrumental in shaping Cisco's future performance. Also, Cisco will have to put up a strong fight against rival VMware.

Considering the ambiguity around SDN and IoT, it is prudent to hold off putting money in the stock for now.

Multinational companies including the likes of Apple (AAPL), Google (GOOG, GOOGL) and Cisco (CSCO) have invested considerable efforts in shifting a major portion of their profits to tax havens in an attempt to escape the grueling tax rates in the U.S. However, if Capitol Hill lawmakers proceed with a nascent push to provide tax incentives to home-grown businesses then these multinational companies could see an influx of substantial overseas profits.

As per news reports, Congress is now considering to establish a three-year tax holiday lowering the U.S. tax rate on overseas profits to less than 10% from current 35%. As per this Bloomberg report last year, Cisco's untaxed overseas profits stood at a whopping $41.3 billion, and if the tax repatriation holiday is implemented, then it could be a reasonable reason for the investors to rejoice.

Is Cisco ready for a new leader?

While, the news of bringing the stacks of cash kept outside of U.S. is definitely worthwhile, the investors are seemingly concerned over the internal issues facing Cisco as was reflected by the share price movement of around 2% over the last few days. One of such internal issues is the anticipated exit of CEO John Chambers, who has held the designation over the last 20 years.

A good number of analysts have debated the need for new leadership in order to pull out Cisco from a rough patch owing to a slowdown in its networking equipment business. For instance, the revenue for switching division declined by 6% while routing division faced flat demand in the last reported quarter.

If media reports are to be believed then Cisco is looking at a massive re-organization plan, which also includes the exit of current CEO John Chambers. Even though nothing has been specified by the company, it is expected that the successor to Chambers will be from inside the company.

The investors have shown their willingness to see fresh leadership at the top after disappointing results over the last few quarters. Though it cannot be said with certainty if the new leadership will perform exceptionally better than the current management but the change in Cisco's guard will definitely spark a positive sentiment among investors.

Cisco's status with respect to SDN

In one of my earlier articles on Cisco, I mentioned about the growing adoption of Software Defined Networking (SDN) and how the company had attempted to consolidate its portfolio of networking components in order to offer a complete packaged solution to its customers. Recently, Cisco announced its intent to acquire the privately held Tail-f Systems, a developer of multi-vendor network service systems for traditional and virtualized networks. Also, Tail-f Systems was one of the vendors that AT&T had selected for its Domain 2.0 SDN project. In a nutshell, Cisco is eyeing to virtualize the AT&T service network with SDN and network functions virtualization.

Interestingly, Cisco's fierce rival VMware (VMW) also has a presence in the AT&T data centers through its NSX network virtualization platform. The VMware NSX was launched by the company back in 2013 after the amalgamation of its vCloud networking product line with the NFV platform of Nicira. The NSX platform aims to offer similar efficiencies with respect to speed and cost as offered by the software defined mega data centers. The advantage with NSX though is that it can be utilized for any application that the customer might be interested in as compared to SDN powered data centers that offer the support for custom applications.

Now, the imminent threat to Cisco arises from the launch of the NSX platform as VMware has overhauled its software centric approach to networking and it could poach Cisco's market share quite soon. In order to combat this looming threat, Cisco will have to ensure a better software-defined approach as its networking model has been centered on hardware till date. It is praiseworthy that Cisco has already attempted to provide an alternative to its clients in the form of Cisco ONE, which is essentially a comprehensive package to help networks become more open and programmable.

The worth of Internet of Things

Besides the opportunities and challenges presented by SDN, Cisco is also looking into the "Internet of Things" (IoT), a thought pioneered by CEO John Chambers. As reported by this article, Chambers thought the IoT is an opportunity worth $19 trillion. A good number of analysts are having trouble in digesting such a massive number and more so because the IoT does not represent a wholesome market but a collection of disorganized and fragmented markets in Government, automobile, healthcare and other industries.

Final words

It is beyond doubt that Cisco is transitioning through a critical phase and faces impactful changes going ahead. The anticipated changes in leadership as well as the multitude of changes required in its approach to SDN and IoT will cause volatility in the price. Even though Cisco is comparatively inexpensive with a forward P/E of 11.40 as compared to an industry average of 16.3, yet my advice would be to wait for execution of some of the changes professed by the company before investing in the stock.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.