Cisco down. But up.

Wednesday evening we had Cisco release their 3Q results, which were a beat on the streets expectations. The beat resulted in an increase of 6% in their share price yesterday. So here are the numbers, revenue of $11.55 billion, down 5.5% but better than the expectations of $11.3 billion and even better than their own guidance of a drop between 6-8%. Margins were better than expected as well, with gross margins sitting at 62.7% compared to expectations of 61.3%. EPS is down to 42c a share from 46c the same time last year.


A big contributor to the drop in revenue is due to orders in emerging markets being down 7% yoy, with Russia and Brazil being the two weakest with drops of 28% and 27% respectively. Russia having a big drop is understandable due to their Ukraine foray, but I haven't seen a reason for Brazil. In any case they do say they don't expect emerging markets to pick up for a couple of quarters. Compare this to US orders being up 7%. The US is where the growth is due to its size, both in number of companies and spending power.


A big story for Cisco is their prediction that by 2020 the "Internet of everything" will have an economic impact of $14.4 Trillion. Not a small number by any means, with Microsoft saying that it will be worth $1.6 trillion within the next four years (a lot lower number but highlighting the potential for this new area of connectedness). The "Internet of Everything" is where you will have smart devices in your house and life. Where all these smart devices will speak to one another and to you were ever you are. This is great news for Cisco because as more devices start talking to each other the more switches and other networking devices they will sell.


The company has over $50 billion in cash, which is around 40% of their current market cap on a P/E of 16. So it is by no means expensive, but I think that the valuation given to it is based on the fact that we probably are not going to see it shooting the lights out in the growth department. Another problem is that a chunk of the cash is sitting outside of the US, so it isn't able to be put to work as efficiently as it could be, be it in the form of dividends or further capital expenditure. The internet and communication is the future and as more people come online the more products Cisco will sell, so the future looks good. We feel that the management team needs a shakeup though, John Chambers the CEO and Chairman has been there since 1995. In the world of tech it is important to stay one step ahead of everyone and in Cisco's case fresh blood could spur on growth.