Cisco (CSCO) sunk after reporting earnings results and impending job cuts late Wednesday. Cutting jobs hurts stocks and can be a sign of poor management, but the market's strong reaction to the news does not necessarily mean those assumptions are true. In fact, a closer look at the numbers could indicate something entirely different - management that is responding effectively to changing markets and making tough calls to preserve shareholder value. Investors can take advantage of these types of sell-offs, using the temporary reduction in a company's price to catch the wave toward greater returns in the long term.
Cisco isn't cutting jobs - it is repositioning itself with a focus on its highest areas of growth. Cutting the fat, allocating resources toward its greatest strengths, and focusing on where the market needs Cisco is a good thing. The recent sell off - Cisco was trading at $25.20 when the market closed on Wednesday, and it was trading at $24.54 at market close Thursday - just means that would-be investors have a chance to buy in at a lower price than they would have, and enjoy greater returns once the market corrects.
Cisco reported Q4 revenue of $12.4 billion, which is relatively flat year over year. The company's earnings came in at $0.43 per share GAAP and $0.55 per share non-GAAP. This brings Cisco's fiscal 2014 to revenues of $47.1 billion GAAP, a decrease of 3% year over year. The company's net income took a much harder hit. GAAP results were $7.9 billion, down over 21% from FY 2013's net income of $10 billion. This translated into a GAAP EPS of $1.49, a decrease in GAAP earnings per share of roughly 20% from FY 2013's $1.86 and a small 2% increase in non-GAAP earnings, to $2.06 in FY 2014 from $2.02 in FY 2013.
Shareholder value was preserved. "We returned a record $13.3 billion to shareholders this fiscal year through share buybacks and dividends," stated Frank Calderoni, Cisco executive vice president and chief financial officer in the company's earnings press release. "We remain committed to delivering value to our shareholders through our capital allocation strategy and continued investment in our long-term growth opportunities."
Job cuts are part of that. The company is cutting jobs - 6,000 in all - but its head count will remain the same. According to CEO John Chambers in an interview with Bloomberg, "we are moving the company to where the growth is going to be. Areas like cloud, areas like software, areas like security. Our cloud business, our UCF business grew 30% this last quarter, our security business grew 29%, our global commercial and enterprise around the world grew 8% and 9%, respectively. In the US it was on fire. The US enterprise business grew 17%, the US commercial business grew 16%." There were similar numbers in Germany and the UK.
According to Cisco's earnings statement, the company "estimates that global Internet Protocol (NYSE:IP) traffic will increase nearly three-fold over the next five years due to more Internet users and devices, faster broadband speeds and more video viewing." Given that "IDC ranked Cisco the number one provider of x86 blade servers in the Americas, measured by revenue market share, according to the IDC Worldwide Quarterly Server Tracker, 2014 Q1, May 2014," the company is in good position to harness this growth so long as innovation keeps pace - and there are several reasons to think it will.
Cisco has made a range of acquisitions that should help the company going forward. Acquisitions of malware company ThreatGRID, browser collaboration company Assemblage, and multi-vendor network Tail-f Systems each contribute to Cisco's strategic focus. In addition, Cisco Investments, the company's venture capital division, has allocated $150 to "fund early-stage companies focused on next horizon themes to accelerate the development of disruptive technology markets, including big data and analytics, the Internet of Things, connected mobility, storage, silicon, the content technology ecosystem and India innovation," plus "an additional allocation of $40 million to fund early-stage firms in India focused on products and technologies that are unique and relevant to India and other emerging markets." Cisco Investments will spend $150 million CAD on innovation projects in Canada.
According to Cisco's 2013 Annual Report: "As we turn our attention to the future, we see opportunities to continue to drive profitable growth. These include cloud and the unified data center, the mobility market transition, and next-generation video. We are investing for growth in services, security, emerging markets, and software offerings. And we will continue to move into new markets that provide recurring revenue streams. Longer term, we intend to focus on IoE. We believe that by bringing 'everything' online, IoE will create significant opportunities for organizations, communities and countries to obtain greater value from networked connections."
These acquisitions and investments will help achieve those directives. Security in particular remains a major issue. In Cisco's 2014 Annual Security Report, the company identifies the trend in malware attaching to trusted programs. This proves its own complications but there is also an issue in client company behavior: "Java comprises 91 percent of web exploits; 76 percent of companies using Cisco Web Security services are running Java 6, an end-of-life, unsupported version." In addition, threat reports are growing by a rate of 14% year over year.
Cisco's acquisition of ThreatGRID should help mitigate these risks. "ThreatGRID's private and public cloud-based technology combines dynamic malware analysis with analytics and actionable indicators to enable security teams to proactively defend against and to quickly respond to advanced cyber-attacks and malware outbreaks," explained Cisco in a press release announcing the acquisition. "ThreatGRID complements Cisco's Advanced Malware Protection portfolio and the private-cloud products expands Cisco's ability to protect customers with stringent in-house data retention requirements."
The current sell-off puts Cisco's share price at $24.54, which gives the company a forward price to earnings ratio of less than 11 and its ttm PE at 16.56 - which is significantly less than its industry's average PE of 19.69.
In addition to attractive valuation levels, Cisco is also strong financially. The company has a low debt-to-equity ratio at 0.37. It is higher than its industry average but the company has made several acquisitions. Moreover, Cisco has very high liquidity with a current ratio of 3.19. The company also boasts good cash flow from operations and strong gross profit margins.
Cisco may have cut jobs but it is a strategic move. The company is reallocating its resources to its strengths and areas of highest growth. Cisco is strong financially and priced low thanks to the market's reaction to the cuts. Take advantage of the sell off and buy in for a long position.
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.