Few companies have been as central to the Internet's development as Cisco. ISPs, private companies and public institutions have relied on its switches and routers so much that the San Jose company's name might as well be synonymous with the Net's infrastructure.
But for several years, Cisco (CSCO) has been struggling to find a suitable second act. At the dot-com peak, Cisco was briefly the most valuable company in the world, with a market cap of $500 billion. For most of the past 10 years, it's stock has vacillated in a range of $15 and $30 a share. And in recent years, things have slowed even more: Its quarterly revenue has risen only 8% over the past three years, while net profit declined 44%. More worrisome to investors, its gross margins deteriorated year after year as competitors battled Cisco in the core markets that made it a giant.
So when Cisco, in reporting its earnings for the quarter ended October 29, said that gross margins came in at 62.4%, it caused a stir among analysts and investors. After all, that ratio is below the 64.3% of a year ago and even the 62.7% of the previous quarter. But instead of falling, Cisco's stock rallied 8% over the next two days, reaching its highest level in nine months.
That's because most investors were bracing for even weaker margins -- something closer to 61%. Competitors like Hewlett-Packard (HPQ) and Juniper Networks (JNPR) have been waging a price war in switches and low-end routers, trying to boost volume in the face of a weak global economy. That has put a steady weight on Cisco's gross margins, which were closer to 65% in 2010 and around 70% several years ago.
CEO John Chambers had vowed to stem the decline and shift the company's focus from revenue growth to higher gross margins. It was a cornerstone of a three-year restructuring he had engineered to shore up Cisco's profits. And it looks like the restructuring is finally working -- at least for now.
There were other mildly encouraging signs. Revenue from switches, a third of the total, was flat, but orders increased by 10%. Overall, orders increased 13% in a seasonally weak quarter -- including a 10% increase in orders from the cash-strapped public sector, reversing a 4% decline in the previous quarter. Even orders from the Europe and Middle East rose 13%.