Despite Weak Outlook, Cisco Will Continue Hiring And Acquiring

Cisco (NASDAQ:CSCO) this week reported first quarter results that beat estimates, but its outlook missed estimates. Though it has been the norm for Cisco to provide a conservative outlook, this quarter the outlook is much grimmer and far short of analyst estimates. Despite the poor outlook, the company still expects to add jobs. Let’s take a closer look.

Financials

First quarter revenue was $10.75 billion, up 19%. Net income was up 8% to $1.9 billion or $0.34 per share versus $1.8 billion or $0.30 per share last year. Adjusted EPS was $0.42 versus analyst estimates of $0.40. During the quarter, Cisco repurchased shares for $2.5 billion. It still has $4.5 billion in its authorized repurchase funds. The company ended the quarter with a cash balance of $38.9 billion, compared with $39.9 billion last quarter.

Switching revenue was $3.6 billion, an increase of 25% y-o-y. Modular switching revenue was up 25% and fixed switching revenue increased 24% y-o-y. Routing revenue was $1.8 billion, up 13% y-o-y, representing an increase of 16%, 7%, and 8% y-o-y in high end, mid range and low end, respectively.

New product revenue totaled $3.1 billion, representing an increase of 22% y-o-y. Data center saw strong growth of approximately 59% and collaboration of approximately 45%. Security was down 2% y-o-y, while wireless was up approximately 9% and video connected home was up approximately 11%. From a collaboration perspective, which includes the impact of Tandberg, the company saw solid order growth globally over 60% y-o-y.

Recent Acquisitions

During the quarter, Cisco completed its acquisitions of Arch Rock and ExtendMedia. Arch Rock is a pioneer in Internet protocol–based wireless network technology for smart-grid applications and would enhance Cisco’s IP-based end-to-end smart grid solutions. Both Cisco and IBM have been active in Smarter Planet solutions or smart grid technologies, which aim to improve the management of energy use and transmission, reducing electricity bills and congestion and stimulating job growth.

ExtendMedia is a provider of software-based content management systems (CMS) that manage the entire lifecycle of video content through monetization for pay media and ad-supported business models. Cisco expects ExtendMedia to strengthen its position in the delivery of IP video services by enabling service providers to provide a more interactive and personal experience.

Weak Outlook

For the second quarter, Cisco expects revenue to grow 3% to 5% y-o-y to about $10.1 billion to $10.3 billion while analysts expect 13% growth or $11.1 billion. For the fiscal year 2011, Cisco expects growth of 9% to 12% versus analyst estimates of 13% growth.

Following its conservative forecast, Cisco’s share price dipped, and it is currently trading around $24.5 with market cap of about $139 billion. It hit a 52-week high of $27.74 on April 30 and a 52-week low of $19.82 on August 31.

During the earnings call, CEO John Chambers pointed to a slowdown from the public sector, which accounts for about 22% of Cisco’s revenue. He also said that North American cable providers have cut back on spending, pressured by a weaker housing market and continued cutbacks in consumer spending. Chambers warned that the weakness in these areas will continue for the next few months.

Despite the weak outlook, Cisco says it will continue hiring and acquiring. Cisco added 1,900 jobs in the quarter, including 150 from acquisitions. Over the past two quarters, it added 600 jobs in sales and expects to continue hiring, assuming the government will continue to support private job creation.

In my most recent post on Cisco, I wondered if it should try to hire Mark Hurd to help shed same of its fat. Hurd has gone to Oracle, and Cisco will have to manage on its own.

Cisco will also continue with its aggressive acquisition strategy. It has moved to many adjacent markets and has been aggressive in its acquisitions. It has even launched a new tablet, Cius. Is the company losing its focus? Early in the year, Om Mallik of GigaOM pointed out that competition has started eating into Cisco’s core markets:

“Cisco’s share of the Ethernet switching market declined to 67 percent in 2009 from 71 percent in 2008 and 72 percent in 2007. The reason: competition from HP, 3Com, Juniper Networks, Brocade, f5 Networks and Citrix. I’m not sure if the rivals are doing all that well so much as they’re causing Cisco some migraines.

Alcatel-Lucent and Juniper claimed 20 and 19 percent of the carrier edge routing market respectively in 2009, while Cisco’s market share declined 8 percent to 43 percent.

In the core routing business, Huawei increased it share in 2009 to 12.4 percent vs. 10.6 percent in 2008. Cisco, meanwhile, saw its share of the market slip 1 percent to stand at 55 percent.

In the enterprise routing market, Cisco saw its share stay flat with 2008 at 82 percent.”

Cisco faces stiffer competition from Juniper, F5, and now from HP after HP’s 3Com acquisition. It has recently reported market share gains in its core competencies, but only time will tell if its competitors are gaining faster.