Cisco Grows Fatter, Shows Emerging Market Weakness: Corelated?

On November 7, Cisco (Nasdaq: CSCO) reported results for the first quarter fiscal year 2008 that ended October 27, 2007. Earlier posts are available here, where I said that Cisco needs to slim down, and here, where I discussed Cisco’s prospects as an Online Video beneficiary. In this post, we will take stock of what happened since we last reported on the company.

Net sales were $9.6 billion, up 17% y-o-y and 2% q-o-q. GAAP net income was $2.2 billion or $0.35 per share. During the quarter, it repurchased 96 million shares of common stock for $3.0 billion. Headcount at the end of the quarter was 63,050, an increase of 1500 (in sales, services, and engineering) from the last quarter. Looks like Cisco is fattening, instead of slimming down. I don’t like that.

Segment-wise, routing revenues grew by 18% y-o-y to$1.9 billion primarily due to growth in high end routers. Switching revenue was $3.3 billion, up 8% y-o-y. Advanced Technologies revenues were $2.4 billion, up by 27% y-o-y with strong performance in Unified Communications, video systems and storage. Unified Communications, including WebEx, had a revenue growth of above 70%. Earlier, I applauded Cisco’s strategic move to enter the high growth Collaboration business with the Webex acquisition.

During the quarter, Cisco acquired Cognio, a market leader in wireless spectrum analysis and management for wireless networks; Latigent, a leading provider of web-based business intelligence and analytics reporting solutions for contact centers; and Navini Networks, a leader in the Mobile WiMAX 802.16e-2005 broadband wireless industry. Recently on November 19, it made its 125th acquisition with Securent, Inc., a leading provider of policy management software for enterprises, something it needed for managing large collaboration deployments inside enterprises, as a result of the Webex purchase.

For Q2 fiscal year 2008, Cisco expects a revenue growth of approximately 16% y-o-y.

Cisco last week announced Cisco Trusted Security (TrustSec), a new architecture for enterprise-wide security. It integrates identity and role-based security measures to address the compliance requirements for a global and mobile workforce.

Its stock is trading around $27 after hitting a 52-week high of $34.24 on November 6. Market cap is around $165 billion.

Recently, Bain Capital and Chinese company Huawei have announced plans to buy 3Com. The investment thesis for this deal is the fact that Cisco has high margins, and a competitor with a better cost structure can compete against it in some key markets, especially, India and China, two of the world’s greatest growth markets. Here is an article from Seeking Alpha that discusses Cisco’s Emerging Market weakness: “Specifically, emerging markets revenues grew 19% YoY in the October quarter, down from 35% YoY growth in the August quarter and 36% YoY growth in the same quarter a year ago.”

We are going to monitor this crucial piece of Cisco’s strategy going forward, to track whether this is a one-off event, or whether competitors are truly figuring out a pricing angle that hurts Cisco’s ability to compete.