Cisco Full Year

As promised, Sasha covered the Cisco results from last week.

Cisco had numbers on Wednesday evening our time, after the market. The overreaction Thursday in the trading session was that the stock sank 7.17 percent, sold off heavily after a 30 odd percent gain for the year, prior to the session collapse. It always amazes me how ruthless the Americans are, if you miss, you are punished. Equally if you beat, the heat is on!! Back in the middle of May, when Cisco reported, the stock ramped up over ten percent. Why the sell-off, what could it really be attributed to?


The company also announced that they would be cutting 5 percent of their global workforce, or 4000 jobs. That is over the next two years. Now that sucks, nobody likes to see jobs lost, skilled or unskilled or otherwise. That is on top of 6500 announced in July 2011 and 1300 last year, nearly 15 percent of their workforce has been let go of, over the last three years. Including also passing on some of their workforce to Foxconn too, around 5000 odd people were transferred in Mexico of all places. I am getting this info from Marketwatch!


Let us take a few steps back, Cisco was founded in 1984, so it turns 30 next year, but it is considered one of the old guards in hardware technology. Cisco is the market leader in routing, wireless LAN's, switching, web conferencing, security and number 2 in storage, their brand new business that they have a 44 percent share in. I am guessing then that there are only two in cloud storage of any size and scale, because Cisco are the number 2 in this space. The company spends an enormous amount on R&D, last year they invested 5.5 billion Dollars in product development alone, that is huge! The business is global, operates in over 165 countries and inside of the workforce, 2 out of every 7 are engineers.


An amazing statistic from their Q1 document this year in which they suggest that 99 percent of the world is still not connected. Facebook might argue with that number, with their 1 billion plus users.....but Cisco are referring to all the computers of the world, not the people. All of the devices.

Luckily for us, these numbers were for the fourth quarter and the full year, so at least we get a better view. After all, what is in a quarter? For the full year the company managed sales of 48.6 billion Dollars, an increase of 5.5 percent. The bottom line for the full year rose 8.5 percent to 10.9 billion Dollars, solid margins there! Total cash and cash equivalents on hand was 50.6 billion Dollars. To put that into perspective, the share price is around 24 and a half dollars, which translates to a market capitalisation of 130.5 billion Dollars. 38.8 percent of the companies valuation is cash, or roughly 9.5 Dollars a share.


So I guess when affording a valuation to Cisco, we can do a cash and excluding cash valuation, not that it will make a difference. The company earned 2.02 Dollars per share for the year, it trades at 24 and a half Dollars so that puts it on a historical earnings multiple of 12.13 times, and ex the cash 7.42 times. The dividend yield (based on 17 US cents per quarter) translates to 2.77 percent. On an out and out valuations basis, the company still looks pretty cheap.


So why the anxiety? Well, in part their older core businesses, switching and routing, the growth was anaemic to non-existent. Their supposedly fast growing Asian businesses decelerated. And that is part of the problem, the company has suggested that the outlook is still tough. Not quite the pace that they (Cisco) would like to see. And all of this comes after the analyst community upgrading their view on the outlook and their target prices higher than currently.

I would argue that the company are NOT old tech. The internet of everything, as John Chambers has often pointed out, is going to be bigger than most of us think. More interconnected devices, more users and faster routing, switching and bigger storage than ever before. The company is cheap, their prospects are good if not hugely exciting and they are adapting in the right areas. We continue to accumulate and would use this as an opportunity in the recent sell off to acquire more.