Sunday, June 15, 2014

Were Cisco's Earnings Really That Good?

Great operational performance doesn't necessarily mean a stock is a great investment. Sometimes, all it takes is a cheaply rated company to deliver slightly better-than-expected results in order to deliver good returns to shareholders. Such considerations spring to mind when considering Cisco Systems'  latest third-quarter results. They weren't great, especially when compared with a rival like Juniper Networks   in its core switching and routing businesses, but they were enough. So, what are the chances that Cisco can do it again?


Cisco beats its own guidance
At the time of its second-quarter results, there was a sense that the stock could go higher just beating its weak guidance. In fact, Cisco's management had forecast a 6%-8% revenue decline for the third quarter, only to deliver a 5.5% decline. While a mid-single-digit revenue decline is nothing to write home about, there were some positive signs indicating that Cisco can get back to growth.

Total orders grew by 1%, and the book-to-bill ratio was "comfortably above one." Both metrics are an indication of future growth, but they are also a reflection of how bad Cisco's operational performance has been. The following revenue growth chart helps to demonstrate some of the underlying themes.