Cisco Earnings Reflecting Another Tech Bubble
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Cisco beat earnings estimates and improved profits by 18 percent, but is still slashing 4,000 jobs because of economic inconsistency. If Cisco is a tech bell weather, could this be another tech bubble in the making?
[caption id="attachment_1406" align="alignleft" width="210"] Cisco CEO Chambers: Business "nowhere near the pace we want."
Cisco Systems Inc. did well in its latest quarterly earnings, beating Wall Street estimates and improving profits by 18 percent. But the networking giant is also slashing 4,000 jobs -- 5 percent of its workforce -- because of economic instability and weak outlook for future sales, all indicators of another tech bubble.
By conventional standards, Cisco is doing quite well. Sales are up, posting $12.5 billion in quarterly bookings. Profits are up, too, hitting $2.3 billion for the previous three months. Yet, this is a disappointment for Cisco, which says it’s growth is not fast enough.
"The environment in terms of our business is improving slightly but nowhere near the pace that we want," said CEO John Chambers on the earnings conference call.
The job cuts, something Cisco is seemingly making on a regular basis, is intended to cut a $1 billion in expenses so the company and reallocate resources to areas that have greater potential for growth.
So why is Cisco cutting jobs? Why is a generally positive earnings report causing such negative reactions?
Cisco’s earnings are not building confidence in the general tech marketplace, nor dispelling fears the industry is in the midst of another tech bubble.
For much of the last week, market observers and journalists have waited for the Cisco earnings report, expecting strong numbers that would make the world seem right. Vendors and solution providers are seeing sales getting harder, revenue more difficult to turn over and a marketplace increasingly reluctant to buy into legacy sales models.
Other tech bubble indicators: IBM Corp., Microsoft Corp. and Intel have all turned in mixed or poor results in their earnings reports. Hewlett-Packard Co. and Dell Inc., each struggling with sales and revenue as they go through their transitions, continue to try to staunch losses and recapture the growth initiative. And the struggle of vendors is translating down to solution providers.
Insulating the Channel From a Tech Bubble
Saving the channel from the tech bubble troubles are professional and managed services. Solution providers earn as much as 60 percent of their revenue and profit from managed and professional services. While product sales may ebb and flow, high-margin services can be enough to offset the undulations in hardware and software.
The inconsistencies and unpredictability in IT spending and macro-economic conditions are seen by more than just Cisco. Other vendors notice weaknesses in the market that's causing doubts in their plans and forecasts. When that happens, vendors will retrench, which means they’ll cut spending on marketing and channel support.
Could we be in a tech bubble? It’s possible. PC sales are in freefall. Cloud spending is climbing, but not enough to provide replacement revenue for displaced products. Mobility, one of the big three trends, is nearing saturation levels. And Big Data, while promising, is not generating huge business.
Without a big wave in new technology and innovation, the tech market will stall. And that is everyone's quietly held fear.