Cisco Systems (NASDAQ:CSCO), the networking Goliath of the tech world, seems to have been successful in turning around its operations after reporting a series of year over year net profit declines in the past. The right combination of restructuring, making acquisitions that add more value, and economical pricing strategies seem to have resulted in a wonderful combination for success.
For example, Cisco bought privately held Virtuata which deals in security software last month. This would be a great value addition for securing Cisco's virtual machine and cloud computing products.
But besides making value acquisitions, Cisco has also aggressively cut costs and redundancies. This is evident from the fact that the company has cut about 7,800 jobs and has closed operations that were weighing down on it.
Cisco's recently reported fourth quarter results were a lot healthier than what analysts had expected. While the company's net profits rose by an astounding 56% to $1.92 billion, its operating expenses dropped significantly as restructuring charges diminished. The company posted a 4.4% rise in fourth quarter revenue to $11.69 billion mainly due to strength on the domestic sales front, though this was offset by weak European operations which continued to decline on a sequential basis.
Nevertheless, in spite of a seemingly challenging economic environment, Cisco managed to beat expectations both in terms of top and bottom line growth. Moreover, shareholders got yet another reason to pop the Champagne bottle when the company announced a handsome raise in dividends by almost 75%. But things aren't going to be so rosy for the company all the way through.
Cisco has had to deal with competition from the likes of Hewlett Packard (NYSE:HPQ) and Juniper Networks (NYSE:JNPR) in addition to an economic slowdown in the Euro zone. Demand from European countries that account for about 20% of the company's revenue has been witnessing a decline. And from the looks of things the region's economy would probably take a turn for the worse before it begins to show any signs of improvement. But Cisco's problems don't stop at that...
The company faces potential headwinds due to the shift towards software based networking capabilities as opposed to a hardware driven ecosystem. VMware's (NYSE:VMW) acquisition of networking software maker Nicira for a sum of $1.26 billion, highlights this trend.
But while this might be a point of concern for a few, I don't see this as a major threat to Cisco for the foreseeable future. Overall demand for Cisco's networking products should remain robust with the build out of more network infrastructure for the booming cloud computing market. Besides, the with the huge proliferation of smartphones and tablets such as Apple's (NASDAQ:AAPL) wildly famous iPhone and iPad, there would always be an overwhelming demand for internet and data consumption. Moreover, the mobile device industry should act as a key growth driver for cloud computing which in turn should facilitate demand for Cisco's networking products.
To conclude, I'd like to highlight Cisco's incredibly robust balance sheet with cash and equivalents topping a chest thumping $48 billion. It's great to see the company put its best foot forward in these challenging times as well as reward shareholders handsomely in the form of buybacks and dividends. Cisco looks great, and it should be part of every value investor's portfolio.