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Summary

  • The less than impressive earnings announcement caused the stock to take a dip in the last month, which broke the upward momentum the stock had gained since March.
  • The major segments of the company continue to show decline and Cisco will have to take solid steps to stop this decline.
  • Security and wireless segments can make up for some of the losses from other segments. However, these two segments are small and cannot stop the overall loss to Cisco.
  • Restructuring is a sensible step in the current market conditions and layoffs in the under-performing segments should bring in better results.

Cisco Systems (NASDAQ:CSCO) has had a good run since the start of March - the stock had been on an upward trend until the mid of July when the company reported its second quarter earnings. Cisco Systems reported weak results which resulted in a fall in the stock price. Slow growth in the sector has hit the company and investors are skeptical about the future growth prospects of the business.

The company has been taking initiatives to overcome the slowing growth. Unfortunately, the areas it expanded into are not showing any significant signs of rapid growth. In this article, we will take a look into the company's strategy and its assets to find whether it is actually set for future growth. There are a number of areas where the company is working on.

Restructuring is the Way to go Forward

Cisco Systems has taken an aggressive restructuring strategy and intends to let go of around 6,000 employees. This makes up for 7% of the total (74,000) employees the company had when the news came out. Restructuring has been a popular strategy in the sector - Alcatel-Lucent (NYSE:ALU) is already implementing its "shift Plan," which is focused at cutting costs and selling non-core assets. Slow growth in the sector has forced the businesses to focus on cost cutting strategies in order to enhance profit margins. There are some areas that continue to show strong growth prospects and the companies in the sector are focusing on specific segments instead of dominating the whole sector - ALU is focusing on ultra-fast broadband and IP Networking. Similarly, the security sector is showing robust growth for Cisco Systems and grew by about 29% during the last quarter. On the other hand, high end routers, switches, and data center services fell by 7%, 4% and 30%, respectively.

The growth in security came from the recent $2.2 billion acquisition of the security company called SourceFire. However, growth from this segment will not be able to make up for the decline in other segments as it accounts for a small portion of the total revenues of the company. As of second quarter, revenues from the security segment accounted for only 4.1% of total revenues - the contribution of the segment has increased from 3.4% for the same quarter last year. However, it still remains a small portion of the total revenues. On the other hand, the weightage of data center in total revenues is 7.5% as of the second quarter - this segment recorded a decline of 30% in revenues.

Currently, the main problem for the company is its declining revenues from the switches and NGN Routers segment - both these segments account for about 38% and 22% of the total revenues, respectively. The switches segment fell by 4% and NGN Routers segment fell by 7% during the second quarter. We believe most of the job cuts will be done in these two particular areas as these two segments account for large portion of revenues and currently these segments are in a decline.

Wireless Segment Might Be Important for Future Growth

Cisco recently announced that it delivered the world's largest carrier grade Wi-Fi networks at Mobile World Congress 2014. The company had been working on this product with Fira de Barcelona. The statistics of the product are impressive - 80,880 devices were connected to the network, which represents a 100% increase, as compared to what they had a year ago. Even at this peak traffic, it offered 1.2 gigabytes per second speed.

The wireless segment of the company is growing at an impressive rate. In the second quarter, this segment accounted for 6.3% of total revenues compared to 5.6% a year ago. The company also is getting involved in different projects based on the internet of things in the city of Hamburg, Kansas City, Copenhagen and Barcelona. Under these projects, the company will deliver smart and automated traffic, infrastructure sensing and street lighting services. With these projects, this particular segment has the potential to be a major growth driver for Cisco in the future as we move toward the internet of things.

Conclusion

The restructuring initiative is necessary for the company as the growth in revenues is very slow due to the cutthroat competition in the sector. The falling revenues have forced the companies to focus on cost management and niche development - most of the networking equipment manufacturers are looking at developing a niche in the sector. Some companies are focusing on the hardware segment while others are focusing on software-based solutions. Cisco Systems also is focusing on high-growth areas and wireless and security should allow the company to support its revenue growth to some extent. However, the major boost is likely to come from the cost management in other areas.

Additional Disclosure: This article is for educational purposes only and it should not be taken as an investment recommendation. Investing in stock markets involves a number of risks and readers/investors are encouraged to do their own due diligence and familiarize themselves with the risks involved.

Source: Cisco Needs To Find Its Niche And Master That Segment