BusinessWeek published an interesting story this week questioning the future of Exxon, currently the most profitable company on earth. Could Cisco perhaps be the "Exxon" of networking vendors? How well is Cisco management running the business? Yours truly decided to "tackle" the latter question by examining the historical operating margins of Cisco and then correlating them in the same time frame with Cisco's historical stock prices.
Wikipedia states:
Operating Income = Operating Revenue – Operating Expenses
According to Motley Fool:
Operating Margin
Operating margin equals operating income divided by sales. This is one way to show how well management is running the business.
View the past 16 years of Cisco operating income divided by net sales (i.e. operating margin percentage) for Cisco January Quarters:
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Source: U.S. Securities and Exchange Commission
View the past 16 years of Cisco common stock prices (closing price adjusted for dividends and splits ONLY for the day the quarter ended) for Cisco January Quarters:
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Source: Yahoo! Finance
View the past 15 years of Cisco operating income divided by net sales (i.e. operating margin percentage) for the following Cisco Quarters:
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Source: U.S. Securities and Exchange Commission
*Oct. 95 - 36.4% operating margin: U.S. SEC
View the past 15 years of Cisco common stock prices (closing price adjusted for dividends and splits ONLY for the day the quarter ended) for the following Cisco Quarters:
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Source: Yahoo! Finance
How well do you think Cisco management is running the business?
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You need more data
For this to be relevant you need to compare it against the industry's average margin levels. Additionally, you probably need to break it down into product categories as well. You are comparing management against itself in a bubble.
Good Points, but keep in mind
Those are all good points, but keep in mind that this is meant to be a starting point and not a judgement call in itself.
For example, Cisco operating margin dropped 20% in January 2009 when compared to January 2008 (24.5 - 19.5 = 5 / 24.5 = 20%). Hopefully, this obvious variance will motivate readers to examine Cisco's SEC filing for January 2009 which reports that while experiencing a $742 million drop in net sales, Cisco operating expenses simultaneously increased by $49 million (without any "in-process research and development" expense) compared to January 2008.
Brad Reese
BradReese.Com Cisco Refurbished
Nice Article
Nice article Brad, I wrote about problems I see with Cisco and how they could make more money for partners by changing the discount, programs and deal registrations. That might be a good topic for your next article.
What about Cisco bringing back all manufacturing jobs to he USA for all equipment? If they did that they would be the hero's of IT. I was on a conference call with another networking company and they bounced the idea off me if they were to do that, how would it look for their company? I said it was a great idea, people need to buy USA and when they find out that you have a chance to bring jobs back and you don’t by keeping them in Asia and Mexico, it does not look good.
So this company is looking to change their deal registration program, make more money for partners and take the ridiculous discounts off they have now. Let’s be real how can you take 40-60 off list for your product on every sale? This mean your product is either over priced on the retail side or you are making no margin for your company. That’s what this company I talked to last week finally figured out.
Cisco Operating Committee, Councils, Boards and Working Groups
Larry,
Hopefully, the above charts can help provide "historical perspective" from which to compare the current and future results of Cisco's new management organization:
Cisco's Operating Committee, Councils, Boards and Working Groups
It appears that Cisco's new management organization was caught flat-footed in the most recent Cisco January Quarter (i.e. growing operating expenses combined with shrinking net sales).
Sincerely,
Brad Reese
BradReese.Com Cisco Refurbished
Compare
just for comparison, let see similar charts for Juniper, Nortel, Lucent, Microsoft, Brocade, etc
Only Cisco can kill Cisco
However, yours truly is of the opinion that:
Only Cisco can kill Cisco.
Similar to what Sergeant Rhah (played by Francesco Quinn) said to Charlie Sheen's character, Chris Taylor, in the movie Platoon regarding their evil nemesis, the character SSgt. Bob Barnes (played by Tom Berenger):
"The only thing that can kill Barnes is Barnes."
Hopefully, the above charts will be of help to determine if Cisco is seeking to kill itself.
A 20% drop in operating margin (comparing January 2009 to January 2008) without an increase in net sales in my opinion is a very big red flag.
Sincerely,
Brad Reese
BradReese.Com Cisco Refurbished
Cisco had lightning in a bottle
Yours truly received the following email message from a CCIE:
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"Cisco like all big companies and making real change difficult for the company. Looking at the first 15 years of Cisco they had lightning in a bottle. Just think of the network changes in the last 25 years, Thick-coax, thin-coax, Ethernet, Fiber-ring, Token-Ring, ATM, SONet, Fibre-Channel, hubs, routers, switches, MTU’s, Layer-3 switches. In the early years it was almost every other year you had to upgrade you network to keep up with user requirements. Then came the Internet and it started all over again.
"Every year the Price to Earnings ratio was going through the roof. Then came the dot-com bubble and Cisco paid the price like everyone else. Unlike the competition Cisco always purchased complementary companies to support its growth. The dot-com bubble was the crest for Cisco in one respect going from a growth company in a growth industry into a mature company in a changing market. It’s not just at Cisco that these things happen.
"First things first, there is not going to be a new lightning in a bottle any time soon for Cisco or the IT industry in the U.S. Apple got this and moved into iTunes. Google is now a very large player in the Cisco space, because of the cloud. Do you need Microsoft office or a Cisco 3750 1GbE per port switch for users that use their iPhone to review documents in Google Docs?
"Historically lots of mature organizations get into similar ruts. For Cisco, they are in spectacularly profitable ruts, that is the risk to Cisco; is the market just going to go to the cloud and reduce local IT spending? Do you need multiple 6509’s VSS when all of your users are on WiFi - N in the office and G4 in the field?
"Cisco sees this and is moving to support the new emerging productivity industries. Data Center, (Cloud), PCI-DSS, (Credit Card Security), Unified Communications, (more cloud), VMware partnership, Virtualization of equipment, but is it enough?"
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Sincerely,
Brad Reese
BradReese.Com Cisco Refurbished
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