2 Key Areas Where Cisco Systems Needs to Improve
Don't look now, but the turnaround at Cisco Systems seems to be gaining traction. Shares of the technology giant are up about 11% year to date, outperforming the broader market. This includes a strong rally since the company last reported quarterly earnings. Cisco beat expectations and Chief Executive Officer John Chambers went as far as to say his company would "crush" rival VMware in an up-and-coming product area.
But, Cisco's turnaround isn't a done deal, as there are still challenges that the company is struggling to overcome. Not only has Cisco not crushed VMware, yet, but it's falling behind in emerging markets as well.
While its business has stabilized in the U.S., Cisco's international segment is under-performing. Specifically, Cisco's business is declining in the Asia-Pacific region, including the all-important Chinese market. Simply put, Cisco is falling short in emerging markets, which is disappointing since under-developed economies typically represent a great opportunity for growth.
While there are certainly reasons to be optimistic about Cisco's future, its struggle to plant its flag in emerging markets, plus the threat of competition, are still holding it back. Until Cisco demonstrates an ability to overcome these issues, its turnaround will continue to stall.
Cisco flailing in new products and markets
Shares of Cisco Systems jumped higher after the company's last quarterly earnings report, even though beneath the surface the results weren't actually that good.
Cisco posted $11.5 billion in revenue and earnings per share of $0.42, which represented year-over-year declines of 5.5% and 8%, respectively. Plus, breaking down Cisco's performance in terms of geographic region, a striking disparity becomes evident. Cisco held up relatively well in the Americas, where sales fell 3% over the past three quarters combined. In contrast, revenue in Asia-Pacific, Japan, and China fell 7% in the same period.
While Cisco continues to struggle, looking increasingly like a lumbering giant, smaller competitors are catching up fast. Two years ago, VMware acquired a company called Nicira for $1.2 billion, boosting its abilities in a technology called software-defined networking. At the time, VMware management believed the takeover would allow it to enhance its presence in data center and cloud networking.
Chambers dismissed the partnership during the company's third-quarter conference call, claiming that Cisco was making huge strides in the software-defined market and would soon take a leadership position in the industry, thanks to its size and scale.
The results, however, paint a different picture. VMware posted 14% revenue growth and 15% earnings-per-share growth last quarter. The company is doing about as well domestically as it is in international markets; VMware's revenue from outside the United States jumped 14%.
Cisco is spending more to develop new products and enter new territories, but it's unclear whether its investments are paying off. Cisco's research and development expenses are up 6% through the first three quarters of the fiscal year, which has dragged down margins. Net income margin fell to 18.9% last quarter, down 1.4 percentage points from the same period the year before.
The Foolish takeaway
While Cisco shares rallied after the company reported results last quarter, the underlying results are yet to be seen. Cisco has posted weak results for several quarters now, but the stock has outperformed the market so far this year.
Cisco has two major concerns that need to be addressed going forward: its declining position in Asia-Pacific, Japan, and China, as well as the threat of smaller competitors taking market share in new product areas.
For instance, Chambers boasted that his company would crush VMware in software-defined networking, but so far, it's just talk. Actually, VMware is doing quite well, particularly in geographic regions where Cisco is struggling.
Cisco's management needs to get its act together and avoid falling behind, before the company's turnaround can be considered a done deal.
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The article 2 Key Areas Where Cisco Systems Needs to Improve originally appeared on Fool.com.Bob Ciura has no position in any stocks mentioned. The Motley Fool recommends Cisco Systems and VMware. The Motley Fool owns shares of VMware. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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