Investors’ alarm bells rang over margins. During the quarter, gross profit
margins fell more than 3 percentage points to 62 per cent.
The company’s mature switching business, which contributes about 30 per cent
of its revenues, is under pricing pressure both from rivals such as
Hewlett-Packard and a shake-up from cloud computing.
Rivals’ ability to catch-up – or Cisco’s inability to stay ahead – has led to
sales of switches falling for three straight quarters, while revenues from
routers, another mature segment, fell 9 per cent versus the prior quarter.
No bellwether
Having now reported three consecutive quarters of disappointing results, Cisco
is no longer the bellwether for the overall level of technology investment
it once was. Indeed, Cisco’s share price rout had no impact on trading in
other tech stocks, including IBM, Dell, HP and Microsoft. That compares with
November, when disappointing first-quarter results sparked a 15 per cent
drop in Cisco’s share price and a sell-off in the other four.
Sure, John Chambers, Cisco’s chief executive, is aware of the declining growth
in traditional markets and has invested in an array of new products, such as
data centres.
Investors, though, fear that growth in new areas will not outweigh the loss of
the old and now value the stock at 14 times future earnings, more than
one-quarter less than they did in 2009.
Mr Chambers, though, does have options; namely the $40bn in cash sitting on
his balance sheet. It was saved for a rainy day. Now that the clouds have
rolled in, it is time to put it to work
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