Cisco’s Challenges Mount as Shares Take a Dive

by Matt Klassen on November 12, 2010

The strange thing about quarterly earnings reports is that while the numbers don’t lie, the interpretation of those numbers can lead to a plethora of different conclusions. That’s why worldwide network and communications leader Cisco can post a solid quarterly earnings report and still find its shares slumping significantly after it reported less than stellar sales projections for the next quarter.

So what does this mean for the communications giant? For starters analysts are reporting that such modest sales projections may be evidence that not everything is copacetic within Cisco’s ranks and that the company is looking to tighten its financial belt in preparation for predicted hardships to come.

But talking to Cisco executives about the disappointing projections and you’d think that everything was status quo at the company, just more evidence that sales reports can really say anything you want.

So what do the real numbers within Cisco’s quarterly earnings report say? The number for the first quarter were actually surprisingly good—surprising in light of the doomsday prophecies that seem to have spawned from them—with Cisco posting revenues of approximately $10.75 billion dollars, translating into approximately a $0.34 cents per share increase.

The real shocker didn’t come with the first quarter earnings, however, but in the second quarter earnings forecast, which foresaw a paltry increase in profits of only three (3) to five (4) percent, well below the Wall Street consensus. For those like me who aren’t so market savvy, the bottom line is that the market assumed Cisco would forecast a substantially higher number for its next quarter profits, and seeing such a low figure caused many analysts to downgrade Cisco’s market value over fears that Cisco is preparing for an uncertain future.

The result of such a kneejerk market reaction has been the spiralling of Cisco’s stock, as share prices fell by a whopping $3.97, which translates into a 16% drop,to close yesterday at $20.52. It was the biggest drop in share prices that Cisco has seen since back in 1994, and only the third-worst day for the company’s shares since 1984.

But amidst all this Cisco’s CEO John Chambers seemed reservedly pleased about the results, noting that the company achieved “solid financial results during a challenging economic environment.” The weakness of the forecast, Chambers noted, was due to uncertainty in the market, particularly when it comes to its government contracts, as Cisco saw its profits from the government sector drop by a staggering 25%.

For many analysts, however, this slump in Cisco’s sales is evidence of a wider issue, one that many claim Cisco is still in denial over. Simply put, Cisco as a company is now too big and too cumbersome to be able to be managed effectively, the natural result of which is slumping sales due to mismanagement, company bureaucracy, and market stagnation, meaning, simply enough, that Cisco can only grow so big.

So what will this mean for Cisco’s future? In the short term it means that Cisco will continue to see slumping profits so long as the government sector continues its austerity measures in an effort to pull America out of its recession. In the longer term, it means that Cisco will need to manage its various enterprises for efficiently or face the reality of loosing its grip on the market to smaller more customer oriented companies. For now, however, it means that Cisco shareholders will have to take one on the chin and hope that the future is brighter than it’s forecast to be.

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