Having Taken Its Restructuring Medicine, Cisco Points to Better Days Ahead
The troubled networking giant Cisco Systems holds its financial analysts meeting in San Jose, Calif., today. And the expectation is that CEO John Chambers will reset the company’s long-term growth expectations downward to a trajectory that’s more in line with the troubled marketplace the company has found itself in recently.
Additionally, Chambers (pictured from his interview at D5) will likely lay out his plan to get Cisco growing again, following a restructuring that saw 6,500 jobs eliminated, and certain parts of the company — in particular, the Flip video camera business — shut down.
Financial analysts have been agitating for Cisco to take down its long-term financial models for most of the year, and since they’ll be the ones in the audience today, Chambers would be nuts not to address their concerns. The model may seem like a small detail, but analysts rely upon these forecasts in order to help them calibrate their expectations, and thus help their clients make better investment decisions going forward.
One recent suggestion for how the new model should look came from Gleacher analyst Brian Marshall in a note to clients on Aug. 11. He suggested that Cisco could realistically forecast annual revenue growth of 10 percent and an operating margin of 25 percent. Currently, he says, Cisco’s long-term growth models call for sales to grow annually in the 12 to 17 percent range, with operating margins in the range of 28 to 31 percent. Over the last five calendar years, he wrote, Cisco has averaged revenue growth of 11 percent — worse if you exclude growth from acquisitions — and operating margins just shy of 29 percent.
But it won’t all be numbers and figures today. Alongside the analysts meeting, Cisco will be talking about some new server technology it has developed internally using the UCS computing platform it developed with EMC and VMWare. Cisco has opened up a data center in Raleigh, N.C., that it says is being used for two things — applications development and disaster recovery.
Now, if you don’t know anything about disaster recovery, allow me to explain why that’s a big deal. The typical way companies use disaster recovery is to have a second data center — essentially a carbon copy of the first one that’s used day in and day out — sitting on standby, waiting for the day when it is needed. And while it’s critical to have when the power goes out at your primary site, or some natural disaster like a tornado strikes, it’s also expensive. Disaster recovery hardware sits around doing nothing important, while at the same time racking up costs for power, maintenance and floor space. Wouldn’t it be great if you could use it productively, too?
Cisco has figured out a way to do exactly that, and will demonstrate it today. The data center, which is in Research Triangle Park, has been set up to support application development on a daily basis, but if disaster strikes one of Cisco’s other main data centers — its sites in Texas, for instance — it can be turned around within 24 hours and serve as a disaster recovery site. Oddly, Cisco is demonstrating this mainly as a way of showing off what UCS can do, and it’s also sharing the particulars with customers. It is not, however, offering it as part of a new product or service.
Cisco shares are still trading in the midteens, down from a 52-week high of $24.60 in November. The shares are showing new signs of life, however. Having bounced off the bottom of a 52-week low of $13.30 last month, they’re starting to climb again. And yesterday Cisco rose 54 cents, or more than three percent, to $16.09. Investors seem hopeful that there will be a better outlook from Cisco today.