Cisco’s Earnings: What You Need to Think About—NOW!

Another week and more financial earnings reports. This time, the IT tiger, Cisco Systems, reported its first fiscal quarter results for the August through October period after the market closed on November 5. The semi-good news: Cisco reported flat profit with an 8.1% rise in revenue. Bravo, particularly after a ‘bloody’ October. The ‘semi-not-so-unsurprising’ and quasi-bad news: management indicated Cisco will begin to feel the slowing and negative economic effects of the global financial turmoil in its second fiscal quarter (November through January). Translation: management expects a decline in sales of 5% to 10% compared to the same quarter last year. The silver lining: John Chambers (Chairman & CEO) isn't changing Cisco's long-term projected growth of 12% to 17% over the next three to five years.

In typical Cisco style, Chambers announced the company had implemented a number of cost cutting initiatives to combat “fuzzy” visibility. These include:

• “Pause” in hiring
  
• Trimmed travel, meetings, and events budgets, including cancellation of all off-site meetings unless with clients and expanded use of its “Telepresence” video conferencing system
  
• Frozen (select) capital projects

The cumulative goal of these steps is to reduce expenses by $1 Billion by the end of its present fiscal year. Yes, Chambers said $1 Billion—with a “B”… And, while spending is being trimmed, Cisco is continuing to make strategic investments in the U.S. market.

Chambers, in his typical matter-of-fact style, said “we are in a bit of uncharted waters,” but the “things we can control or influence are ok.” He also believes the Cisco vision, strategy, and execution are in good shape.

What should we take away from this earnings call? Three points:

• First, focus on what you can control and influence and double check your vision, strategy, and execution to ensure you, too, are in good shape. Great advice in a back-to-basics market.
  
• Second, double check what you are selling or manufacturing to see if it is bullet proof in a down market. As Chambers pointed during the call, network spending is less discretionary today compared to earlier this decade. And even though some customers may “run longer and hotter without replacements,” Cisco’s products are well positioned in an expansion or replacement market.
  
• Third, invest in new and adjacent markets to capture momentum areas. For partners, this means looking at add-on or complementary offerings, such as expanding services around your core product offerings

No company is immune to the widening global economic “flu” and neither are its partners who sell and support products. However, since Cisco offers technology for nearly everything between the user and the servers it is trying to access, chances are better than not that Cisco and its partners will have less of a bumpy road ahead and be early beneficiaries of market recovery.