In a recent Bloomberg interview, CEO John Chambers talked about where he sees Cisco Systems, Inc. (NASDAQ:CSCO) going after its very strong quarter of earnings. The company beat expectations for earnings per share on increasing revenue, and issued solid guidance for the coming quarter and the rest of the year. The question you must now ask is whether the news is a sufficient catalyst to buy the stock. In Thursday’s session, the stock has not reacted much, trading down about 2%, but in line with the market. Cisco continues to be a solid investment with substantial growth potential, even if the stock is largely trading more like a value play lately.
Cisco released earnings on Wednesday after the close, reporting EPS of $0.47 against average analyst expectations of $0.43. The company reported record revenue of $12.1 billion, which represents sequential growth of 1.7% and a year-over-year swell of 5.2%. Where product growth showed an increase of only 3.3%, the growth in the company’s services business jumped by 12.5% on a year-over-year basis to $2.7 billion.
In terms of guidance, the company said it expects EPS of $0.48 to $0.50 moving forward, and an increase in revenue of 4% to 6%. These projections are based on non-GAAP gross margins of 61% to 62% and operating margins in the range of 26.5% to 27.5%. While the numbers are not burning hot, they are in line with what analysts were expecting and put the company on firm footing moving into the next quarter.
Chamber’s take
The longtime CEO offered an particularly interesting take on the state of the economy in which to judge the earnings of his company. Chambers explained that technology and financial companies tend to be good leading indicators for the health of the economy, often showing a roughly three-quarter lead on the state of GDP in the U.S.
Cisco has shown steady growth over the past three quarters, particularly within the U.S. and Chambers believes that can be interpreted as a sign that things are generally improving. He does not believe financials will lead this time, meaning that the health of tech can provide a significant clue to what is coming for us all. This is of particular interest given that Chambers said he believes the most significant portion of Cisco’s growth will come outside of the U.S.
He further commented that as long as the U.S. tax code remains the only one in the developed world that makes it so costly for companies to bring money home, the company would manage its cash accordingly. In a rare foray into politics, Chambers alluded to the fact that President Obama’s message from the State of the Union that American opportunity was critical, saying it would be accomplished more easily if companies could more easily bring their wealth back home. Ultimately he said that Cisco would manage its business to, among other factors, maximize its tax benefit.
