Cisco’s attendance at fat camp has paid off. The networking giant’s boss, John Chambers, was forced to admit early last year that Cisco’s quest for growth over the previous decade had done little more than squander capital, leaving the firm a bloated mess. Since then Cisco has shed excess weight and has just hiked its dividend. Now, it needs to get fighting fit.
The top-line results aren’t particularly impressive for a tech company. Revenue only rose four per cent because networking is maturing and European economies are stuck in a slump. But Cisco’s problems usually centre more on the bottom line and how to reward investors.
Here Chambers’s decision to cut workers and focus on fewer businesses has paid off. Earnings rose 56 per cent compared to the same period last year. That’s the kind of operating leverage shareholders drool over. On top of that, the board of directors is boosting its dividend by 75 per cent to a respectable yield of three per cent. That’s a better use of Cisco’s cash than its previous preference for huge buybacks. These accomplished little more than rewarding insiders. Investors cheered, sending the stock up five per cent in after-market trading.
Cisco can’t coast on merely becoming more efficient though. That can only last so long. The company’s cash cow router and switch businesses are under attack — rivals from Juniper Networks to Chinese firm Huawei want a bigger chunk. And, a new breed of start-ups is pushing virtualisation software that threatens to turn routers into low-margin commodities.
But Cisco is still dominates its markets. And its renewed focus on networking gear — and the increased profitability that’s resulted from this switch — gives it a better shot at honing its muscles.