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Fat Cisco Shines In Telepresence

Posted on Friday, Aug 7th 2009

Yesterday, Cisco (NASDAQ:CSCO) reported its fourth straight quarter of revenue declines as the economy and low-cost competition took a toll on sales. However, the company did manage to beat analyst estimates. Let’s take a closer look.

Q4 revenue was down 18% to $8.5 billion. Net income was down 46% to $1.1 billion or $0.19 per share. Non-GAAP EPS was $0.31 per share, beating analyst estimates of $0.29 on revenue of $8.51 billion. Q3 analysis is available here.

By region, revenue in the quarter declined 5% in Japan, 38% in Cisco’s emerging market theater, 13% in the US and Canada theater, 20% in Asia-Pacific, and 19% in the European markets.

Total service revenue was up 5% to $1.8 billion and product revenue was down 22% to $6.7 billion. Switching revenue was down 20% to $2.8 billion with modular switching down 23% and fixed switching down 17%. Routing revenue was down 27% to $1.5 billion. Advanced Technologies revenue was down 19% to $2 billion. Within Advanced Technologies, Video Systems declined 30%, Unified Communications 5% and Security 19%. Application networking systems was down 27%, and storage was down 8%.

The videoconferencing market has grown 30% as businesses are opting for video conferencing over traveling for meetings. Gartner predicts that by 2012, video conferencing will replace 2.1 million airline seats per year, costing the travel industry $3.5 billion annually. Cisco’s revenue from WebEx was up 14% and TelePresence was up by 97%. According to Wainhouse Research, in Q109, Cisco sold 67% of the 520 TelePresence units sold worldwide, up from 51% of the 235 units sold a year ago, while HP’s share dropped from 11% to 10%. I am very excited to see the adoption of TelePresence and web/video conferencing in general. Remember my Forbes column, Kill The Business Trip, in which I called for this to happen a year ago?

For the full fiscal year 2009, revenue was down 9% to $36.1 billion and net income was down 24% to $6.1 billion or $1.05 per share. Routing revenue was down 21% to $6.3 billion, Switching revenue was $12 billion, down 11%, and Advanced Technologies revenue was down 4% to $9.2 billion. Total service revenue was $7 billion, up by 8%.

Non-GAAP gross margin was about 65% compared to 55% last quarter. Cisco bought back shares worth $800 million during the quarter and 3.6 billion during the full year. It is still left with $4.8 billion in funds for share repurchases. The company ended the quarter and year with cash of $35.0 billion, versus $26.2 billion last year and $33.6 last quarter. Deferred revenue was $9.4 billion at the end of fiscal 2009, up from $8.9 billion last year and $8.8 billion last quarter.

For the first quarter, Cisco expects revenue to decrease in the 15% to 17% range year-over-year and increase by 1 to 3% q-o-q to about a range of $8.6 to $8.8 billion. It expects gross margin of 64%. The stock is currently trading around $22 with market cap of about $128 billion. It hit a 52-week high of $22.61 on August 3.

Chart for Cisco Systems, Inc. (CSCO)

Cisco has fully implemented its cost reduction measures and has saved more than $1.5 billion through 2,000 job cuts, curtailed hiring, reduced travel, and merged offices. It reduced its headcount by 1,013 during the quarter and total headcount is now 65,545. Still too fat, in my opinion.

However, cost-cutting measures don’t quite match up to the cost and development advantages that 3Com (NASDAQ:COMS) enjoys from its low-cost structure in China. 3Com matches Cisco’s products with prices that are 30% to 40% less, with almost twice the performance and capacity. With 3Com deciding to focus on developing its enterprise networking market outside China, Cisco is going to face intense competition added to the aggressive competition from HP ProCurve. After Nortel’s bankruptcy, 3Com is the only major networking player with a full portfolio of products to counter Cisco. 3Com already has contract wins in North America, Brazil, and Europe including the SNCF national railway company in France and the Russian Savings Bank. Cisco might continue to be at the top of the networking industry with its diversification, but my sense is that if 3Com executes, it is likely to be able to pick up 3 to 5 percentage points in market share over the next 18 months. Of course, whether 3Com can execute or not remains to be seen.

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