Cisco first quarter miss

Cisco results after hours yesterday. The disco ball came crashing down. That John Chambers (the CEO and Chairman), it is time for him to go. CEO since 1995, chairman since 2006. Or not, I know that there have been loads of people calling for his head, he certainly has been around Cisco for an absolute age and I would guess knows the hardware market better than many. Chambers is 64, he has just turned 64 in August, he looks healthy and I would think still has many ambitious plans in this exciting phase of the company. So I guess his days are numbered as CEO, perhaps as Chairman he will be around for a while. Turned out pretty good for a guy who was diagnosed with dyslexia!


As of last evening, Cisco had a market cap of 129 billion Dollars, remember that piece that I did a while back on them becoming the first business to a trillion Dollar market cap, back from March 2000. Well, turns out that 120 times earnings (in todays terms) would have taken them comfortably beyond that, but we live in a different world. In August last year when Apple blew through 500 billion Dollars in market capitalisation you saw the same stories about being the first company to a trillion Dollar market cap. The current market cap is 468 billion (Apple), the current multiple is 13.14 (earnings of 39.63 on a share price of 520.63 Dollars). If Apple were to become a 1 trillion Dollar company on these earnings, the market would have to afford it a 28 multiple. Does not sound too onerous, not so? Apple is not growing that fast to get that market rating.


And now, Cisco is being trashed, the stock after hours. Normally I look at the results first before seeing what the share price reaction is. Quarteritis is a disease of sorts, judging the company on the last 90 days and then changing your mind. The average traded number of shares daily in Cisco is 37.68 million. There are 5.38 billion shares in issue. Divide the one by the other and you get to 142 days worth of trade. There are 252 trading days in the year, yes, you get as many as 110 plus days off. But that means that every 206 days, or less than seven months, the Cisco share in issue change hands. Sounds too dumb to be true, but that is the case. That is the main reason why I think that the business channels mix the word investor and trader and don't draw a proper line between the two. If you own the stock, you are likely to have owned it longer than most!

These numbers were for the first quarter of their 2014 year. The company recorded a 1.8 percent increase in revenue to 12.1 billion Dollars, but net income fell 4.6 percent to 2 billion Dollars, translated to earnings per share it was a 5.1 percent fall to 0.37 cents. Non-GAAP EPS was 53 cents a share, up from 48 cents a share last time. There was more buying back of the stock, the board have announced that they will add to their existing share buyback program by as much as 15 billion Dollars. That is massive. Huge. Because the market cap as we mentioned was 129 billion Dollars, they have effectively boosted their buy back by as much as 11.62 percent, at the closing price last evening, more today, because the stock slid after-hours.


The main reason that I can pick up is that the companies revenue expectations (from the analyst community) were/was a wide miss. And they had incurred costs in terms of staff cutting and smaller acquisitions, but yet they still have 48.2 billion Dollars of cash on hand. 37.3 percent of their market cap is cash, shave off the projected opening price today and that number swells to over 40 percent. So ex cash the stock trades around 9 Dollars cheaper, around 12.52 Dollars. On around 190 cents for the year of earnings, on an ex cash basis the stock trades at 6.6 times. Cheap. And remember that the dividend is nearly 3.2 percent, judging where the stock is going to open, at 21.30 USD, down over 11 percent.


So the market is telling you two things, one they think Cisco is ex growth and might even be going backwards for a bit and two (possibly more importantly) the market cannot seem to see any signs of growth out there in their core markets. But... I remember two specific graphs that caught my eye in their last quarterly presentation, but maybe one amazing me. It is what Cisco often refer to as the internet of everything. If you think that is a loose and fast title, Cisco quantifies that as being all devices and things being unconnected. 99 percent of the world and things in it are unconnected. Not everything needs to be connected, but it would be nice. This is the evolution of the internet according to Cisco:

So we heading in that direction, from emails to web browsing to where all devices and things (loose word) will be connected. And Cisco will own all of the byways and waterways in which the internet connects devices and things, along with competitors of course. Cisco is basically . As the company that makes the devices and software that allows people to access all their devices from where they want, imagine being able to organise your life with one application on your smart device. Now that would be something. That is why we will continue to recommend the company as being a growth stock, with that growth coming. It may come quicker than you think. After all Facebook were rejected by Snapchat, a 3 billion Dollar buyout. Exactly, a business called Snapchat. If you do not know what that is, ask a teenager.