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I’ve been bullish on Cisco (NASDAQ:CSCO) in articles here and here. Now that the one-year anniversary of my public bull sentiment on Cisco is approaching, I’m taking a hard look into the mirror (and into the company’s recent news) to figure out what has changed.
CSCO recently received a boost due to an upgrade from Goldman Sachs to “Buy.” This movement also went against the current of an edgy market hamstrung by both debt ceiling negotiations and nervousness over a seemingly halfway done Greek bailout. When Goldman speaks, it seems, investors still listen. Goldman’s analysts pointed out that:

Cisco is not a "broken" franchise … Leading surveys suggest that Cisco’s customer franchise is still solid. Moreover, the structural issues it faces are largely contained to the switching business, which drives just one-third of sales.

The switching business is still significant, so to trivialize that third of business would be a mistake. However, they seem to be acknowledging that fact as a handicap while focusing on future growth rates of the remaining businesses. They estimate that this quarter will show the bottom of sales growth and that growth will:

Re-expand toward what we consider its normalized longer-term growth rate [of 5-7 percent yoy into fiscal 2012]. Even assuming a declining switching business … we estimate the growth rate of its remaining portfolio at 8 percent to 9 percent.

This is much lower than Cisco’s traditional growth guidance, but the company has also missed that “traditional” guidance for a number of years. A dose of reality in this case is refreshing, as actual growth will no doubt be closer to 6-8%. Also worth mentioning have been the details of a restructuring that will see numerous Cisco employees gain access to early retirement, with others less amicably removed from their cubicles. Cisco is, in a word, overstaffed; these cuts will hopefully help to make leaner a company that has become somewhat of an albatross. Goldman believes that the Street has been underestimating the benefits of these cost-cutting efforts, which it believes can add five to 10 percent to 2012 earnings projections. The restructuring will not be without its own costs, but those are not expected to exceed $1.3 billion over the next year, with $500 million coming during fiscal Q4.
So is Chambers on the right track, or is it time for a fresh face in the executive chair? I think this next earnings call will tell us a lot about the long term potential of Chambers as CEO. After the disaster that was Juniper’s (NYSE:JNPR) earnings call, I expect similar fallout for Cisco. Governments are slowing down purchases, and more than half of corporate budgets for networking systems have already been spent. The problems that have plagued Juniper over its past quarter will no doubt pinch Cisco’s coffers as well. This should not surprise anyone whose eyes and ears are open. However, the real show will be how Chambers paints the future, given the bold nature of his restructuring moves.
He must decide quickly whether Cisco wants to keep playing in the consumer realm. No one thinks Cisco when they see a LinkSys router, nor should they. CSCO's focus on consumer products seems to have taken away from its prowess in the corporate realm, and this is something it must address. No longer enjoying the status of high quality holistic solution provider, Cisco is being beaten out by more agile competitors with simpler solutions that speak to each other. Additionally, companies are getting more comfortable with the idea of using more than one manufacturer/software provider to create networks. Cisco no longer enjoys the free ride it once did on name alone. Will there be further cuts in its consumer products? I believe there will be.
Chambers said on July 12:

You will see us leaner and more focused. We have got to be more focused and prioritize in terms of where we are going to go.

If Chambers wants to go anywhere but the unemployment line, now is the time to capitalize on the additional length of leash the market has granted him. If gains are not realized from these restructuring efforts, expect big changes to be made at the top.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Source: A Lot Riding on Cisco's Earnings