Cisco Q1 2015 Results Today, a Buy or Sell?

Cisco was hardly considered a dividend play until about two years or so ago. Microsoft was in a similar position. Their reasoning may have been that any dividend payouts may be better utilised through R&D investments and staff interests.

But such a strategy brought no cheer for investors — the share prices were largely stagnating bringing no capital gains for them. Both Cisco and Microsoft then got onto the dividend bandwagon.

I do hold Cisco shares but while dividends are streaming in I will have instead preferred to see the stock price soaring. Instead, any climb is only a trickle, leaving Cisco a perennial underperformer.

Strong Fundamentals: For a company with such strong fundamentals (strong cash reserves, good balance sheet, market leadership, etc) as Cisco that ought to have been a logical path. But that was not to happen. Microsoft, on the other hand, had been yielding good returns for its shareholders.

The Cisco share price is around $25 while that of Microsoft is inching towards $50.

The following may be some factors impacting a surge in the share price:

  • slowing growth
  • the cyclical nature of the economy that cuts into enterprise spending on infrastructure (with Cloud coming a viable option)
  • its partner strategies started to get confusing — and these go beyond Cisco’s decision to enter the server space which put it in competition with HP. Even cloud partners such as vmWare became competitors
  • periodical negative projections from Cisco, leading to share buybacks
  • losses from some of its acquisitions (Navini, with misplaced WiMax bets, and Flip, with an eye on entering the consumer market, for instance). and
  • insider selling (from the CEO and other leaders) may have had an impact on its share price.

iPhone Trademark: There were some good acquisitions as well – such as Linksys and Infogear which marked Cisco’s foray into home networking.

Infogear was an acquisition that gave Cisco ownership of the iPhone trademark. Cisco then launched iPhone VoiP phones through Linksys. That was much before Apple came out with its first iPhone. Cisco then sued Apple for infringing on its iPhone trademark.

Apple, however, managed to strike a settlement with Cisco to get the right to use the iPhone name.

Nonetheless, I thought Cisco’s exit from home networking with the sale of Linksys to Belkin last year did not make much business sense.

Q1 2015 Results Tomorrow: Now with Cisco set to release its Q1 results later today (November 12 after close of markets in the U.S.), will it be a buy or sell? An earning per share of $0.53 is expected. That was what analysts expected in August 2014 as well but its Q4 2014 results then showed earnings of $0.55 per share though sales fell short of the company’s own target.

A Q1 revenue of $12-16 billion is the market expectation, just marginally higher than the $12.08 billion during the same period in fiscal 2014.

I hope they will beat analysts again this time. Regardless, I intend to keep the shares. But if the Singapore dollar continues its fall against USD, then I may cash them out as it could translate to gains from both a higher share price and better returns from a lower SGD.

Succession Planning: Whatever the results, pressure is bound to mount on Cisco CEO John Chambers to quit and pave the way for an outsider to succeed him. Under his visionary leadership, Cisco almost became the world’s first trillion-dollar company during the dotcom boom.

He is a business and thought leader I respect, I have had the opportunity to listen to him many times both in Cisco and in the U.S. during my stay at Cisco. He could keep his audience engaged for hours, quite unlike most business leaders who are only capable of delivering boring verbal diarrhoea.

He is a celebrity CEO perhaps ranking next only to Bill Gates. The latter himself was succeeded at Microsoft in year 2000 by Steve Ballmer, who was replaced by Satya Nadella recently — both were from within the company.

Whether it is an insider or someone from outside who succeeds John Chambers, whenever that happens, some fresh thinking going beyond current influences will be welcome.

Some good insights into Cisco are available at http://seekingalpha.com/symbol/CSCO and at http://www.thestreet.com/story/12950218/1/what-to-expect-from-cisco-systems-csco-when-they-report-earnings.html?puc=CNBC&cm_ven=CNBC

G Joslin Vethakumar

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