That is the unfortunate reality that seems to be striking Cisco Systems (Nasdaq:CSCO) these days and spooking analysts and institutional investors. The question, though, is whether or not a Cisco that may not be quite as dynamic as it used to be is still a worthy consideration for an investor's tech portfolio.
A Spotty Quarter
On first glance, Cisco seemed to post a solid fiscal second quarter. Revenue grew 6% and exceeded even the high end of the range of analyst estimates. Although routers grew 5% and revenue from new products was up 15%, switches were down 8%.
Gross margin is likely to be one of the biggest talking points of the quarter. Whether looking at GAAP or adjusted numbers, gross margin fell and fell hard (down more than four points by GAAP accounting and three points with adjusted numbers). While the company tried to pin some of the blame on new product launches, a mix shift seems to also be a significant factor as the highly profitable switching and routing businesses are not strong. Sales and marketing expenses and R&D did not seem out of line or worrisome, but the damage to the gross margin line was more than enough to be problematic. That said, reported earnings for the quarter were still better than expected. (For more, see Ratio Tutorial - Gross Profit Margin.)
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