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Cisco Trading Near 52-week Lows

Posted on Monday, Jan 21st 2008

In 2007, Cisco benefited strongly from the trends of online video and network convergence with its home video (Scientific Atlanta) and Telepresence ventures. Net sales were $34.9 billion (up 23%) in fiscal 2007 and it added $9.6 billion in the first quarter (up 17% y-o-y and 2% q-o-q). It will be announcing its second quarter results on 6 Feb. During fiscal 2007, it repurchased 297 million shares for $7.8 billion.

Segment-wise, Switches, accounting for 42% of its revenue grew 15% to $12.4 billion. Routers grew 15% to $6.2 billion and Advanced Technologies grew 44% to $8.1 billion. And in Q1, Routers grew by 18% y-o-y to $1.9 billion, Switches grew 8% y-o-y to $3.3 billion, and Advanced Technologies grew by 27% y-o-y to $2.4 billion.

In an earlier post, I had said that Cisco needs to slim down. It still hasn’t gotten onto a slimming program. In the recent Q1 2008, it added 1500 to make the total headcount 63,050. In fiscal 2007 that ended July 28, 2007, Cisco added 11,609 employees to its R&D, sales, and Juarez, Mexico manufacturing facility. 3,300 out of these additions were from acquisitions.

Cisco spent $4.2 billion on acquisitions in fiscal 2007 including Webex (for 3 billion in March) and security appliance vendor IronPort ($718 million in January 2007). Read my post on the Webex acquisition in which I explore the companies that Cisco could acquire to offer substantive competition to Microsoft. In November 2007, with Securent, Cisco completed its 125th acquisition.

In my last post on Cisco, I referred to a Seeking Alpha article that discussed 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.” Further analysis shows that in Q1 2008, Cisco’s Emerging Market sales declined 10.24% sequentially, impacted by the timing of revenue recognition and by reserves related to its credit exposures to a Brazilian importer of its products. Asia Pacific sales declined 7% sequentially and Europe sales also declined 1% sequentially. United States and Canada were the only regions to show a 6.4% sequential growth. The new method of processing deferred revenue seems to be the major reason for the weakness in the Emerging Markets. The next quarter should make it very clear whether Emerging Markets is a chink in Cisco’s armor that the dwarfs could play upon or a shield against the recession. Its stock is currently trading around $24, having hit a 52-week low of $23.98 on January 17. Its market cap is around $147 billion.

Cisco Systems, Inc. (CSCO)

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