Cisco results sparkle, stock surges

Another one in our stable of preferred companies, Cisco released results after the bell last evening. The Cisco disco ball really spun this time, and the dancing investors lit up the dance floor with their crazy moves, sending the stock in the post market up nearly five and a half percent! Excellent, it is about time, shareholders have been getting tired of John Chambers in that Forrest Gump voice of his make excuses. I have seen several publications suggesting that the expensive structures at Cisco are not exactly delivering the kind of return that shareholders would have expected from the kings of routing and switching. The main reason for owning the company is that with the increase in quality of the consumer hardware, both at a retail and business level, and with bandwidth speeds continuing to improve the speed and reliability of the network, the "facilitators" of the internet traffic should benefit enormously.


Cisco published a paper in late May of this year in which they said "Annual global IP traffic will surpass the zettabyte threshold (1.3 zettabytes) by the end of 2016. In 2016, global IP traffic will reach 1.3 zettabytes per year or 109.5 exabytes per month." I get dizzy just trying to work that out! But they make some key points that I have shared from this document Cisco Visual Networking Index: Forecast and Methodology, 2011-2016.

I have picked the key points out of that report, at least for trying to explain why the company is attractive as an investment proposition: "Traffic from wireless devices will exceed traffic from wired devices by 2016." That means your current handset will be working overtime, your tablet (future or current) will become more important in how you consume data. "Globally, mobile data traffic will increase 18-fold between 2011 and 2016." Makes you want to let rip with a few expletives, when you hear that, and is one of the many reasons that we believe that mobile companies are not "ex-growth". The growth predictions for Africa are even further ahead of the rest of the world, as you might imagine. As the gateway and premier provider of the hardware equipment used in routing and switching, naturally Cisco would be in the pound seat.


But it has been tough going. Costs, top heavy management, too many structures in an iffy market exposed them. But they have dealt with that, and investors are slowly starting to see the benefits. Yesterday the numbers were for the fourth quarter and the full year of course. Net sales for the full year clocked 46.1 billion Dollars, a little less than a 7 percent increase for the year. Non-GAAP Net income came in at 10 billion Dollars, which was a nearly 11 percent jump on the prior year, on a per share basis it equates to 1.85. 47 cents for the quarter, which was a 2 cent beat on the Streets expectations. Operating expenses as a percentage of revenue were markedly lower, this is pleasing to see, although gross margins are still not quite at their prior higher levels!

But the biggest excitement that is probably going to cause a little ripple in the corporate sector on the West coast of the US. The dividend has rocketed higher by 75 percent to 14 cents per quarter. Which means that suddenly from yielding NOTHING, the company has gone to being a three percent yielder! And of course the buyback program will continue, the company plans, as they said in their Q4 Fiscal Year 2012 slide presentation is that "Going forward, we intend to return minimum of 50% of free cash flows* annually through dividends and share repurchases." Just to put things straight, the company said: "* Free cash flows represent cash flows from operating activities less capital expenditures, which are defined as 'cash flows from operating activities' less 'acquisition of property and equipment,'"


For the moment there is over one years worth of sales of cash and cash equivalents on their balance sheet, 48.716 billion Dollars as at the end of last quarter. By indicating that Cisco are more forthcoming with the cash, they are telling investors two things. First, the future looks better, so the company can part with some of that cash and secondly the shift to actually do it! The first dividend that Cisco paid was only in March of 2011. 6 dividends only in their entire history. We think that the stock offers very attractive valuations over the short to medium term, and although there are still many question marks about the top tier management, we are pleased. We continue to be buyers of the stock.